Healius-Australian Clinical Labs recently revived merger talks: sources

Healius and ACL are the country’s second and third largest pathology service providers. Picture: iStock

Two of the country’s top pathology services providers, Healius and Australian Clinical Labs, are understood to have resumed talks about a potential $2bn tie-up, say market sources.

The pair carried out discussions about a tie-up in 2023, when ACL made a hostile takeover bid for Healius.

Healius fended off the takeover attempt, which it described as opportunistic.

However, since that time, ACL’s former private equity owner Crescent Capital in September offloaded its final stake in the company it took to market as an initial public offering in 2021 at $4 per share.

And Healius, in the same month, sold its diagnostic imaging business to Affinity Equity Partners for $965m, leaving it as a pure play pathology operator.

Mergers have also been attempted in the past when the pathology assets of ACL and Healius were under different ownership, but objections from the Australian Competition and Consumer Commission have always stood in the way of any transaction proceeding.

However, following booming conditions in the global pandemic when pathology services were in strong demand, the industry faces headwinds such as higher operating costs and weaker demand.

Many experts believe that industry consolidation remains inevitable to sustain strong earnings, and a combination of ACL and Healius made the most sense.

While the ACCC remains an issue, the groups could sell off parts of the business to appease the competition watchdog, is one view.

When ACL listed its share price was $4, and Crescent Capital sold about $400m worth of shares, with the group’s market value at about $800m.

The country’s third largest pathology network with 14 per cent market share, Australian Clinical Labs, is a roll-up of various businesses, including operations from Healthscope and St John of God.

When ACL bid for its bigger rival Healius in 2023, it offered 0.74 ACL shares for each Healius share, equating to Healius and ACL shareholders owning 68 and 32 per cent respectively of the new entity.

Investors have been placing pressure on the two groups to combine, where cost savings have previously been estimated at $95m.

While Healius is the second largest player behind Sonic with 25 per cent market share, the view in the market is that the smaller ACL has a strong operating team and could bring to pass efficiencies by running its bigger rival.

Among ACL’s largest investors are Regal Funds, Australian Ethical Investment, Allan Gray, Investors Mutual, First Sentier and Yarra Funds.

Meanwhile, John Wylie’s Tanarra, Spheria Asset Management and Perpetual are some of the largest investors in Healius.

Shares in ACL have been trading at $3.65 with its market value at $730m, while Healius shares are at $1.39 with its market value at $1bn, so perhaps the values are more aligned than they were last time.

Advising ACL last time around was Goldman Sachs, while UBS and Barrenjoey have been close to Healius.

China’s Jangho offered $1.8bn for Healius in 2019, but was rejected, while Partners Group offered $2.1bn in 2020 but was also rebuffed, but that was when it also owned a primary health care unit and its diagnostic imaging arm.

Any merger would follow the long-anticipated scrip tie-up between fellow healthcare operators Capitol Health and Integral Diagnostics last year, creating a $900m-plus company.