CANADA’S LARGEST CHAIN OF CLINICAL LABORATORIES will change hands in a deal revealed on September 7, 2006 by Toronto’s The Globe and Mail.
MDS Inc. will apparently sell its diagnostics division to Borealis Infrastructure Management Inc., a private equity group owned by the Ontario Municipal Retirement Board (OMERS). The purchase price will be C$900 million (US$806 million).
This is a noteworthy development, for several important reasons. First, veteran lab industry observers consider the price paid by Borealis to be high. The MDS diagnostics division has annual revenue of C$400 million (US$358 million). Borealis is paying more than twice annual revenue to acquire a business that MDS wanted to sell because of its challenging financial prospects.
Second, the sale is also noteworthy because the purchaser was not a company currently in the laboratory business. In fact, there were two investment groups that bid aggressively to buy the MDS diagnostics division. Borealis edged out another private equity firm that included Macquarie Bank Ltd. of Australia and CML Healthcare Income Fund, which owns Canada’s second largest laboratory company.
Such intense interest by private equity investors mirrors a similar trend in the United States, where equity investors have outbid laboratory companies when certain lab businesses have been put up for sale.
A recent example is the sale of Spectrum Laboratory Network in Greensboro, North Carolina to Apax Partners, L.P. last year. It was known that the two blood brothers were among the parties that participated in the sales process. (See TDR, November 14, 2005.)
Emerging New Trend
THE DARK REPORT believes that MDS and Spectrum are early examples of a developing trend within the laboratory industry. Equity investors are willing to pay strong prices to buy laboratory assets when they come to market.
Over the past 10 years, equity investors who funded laboratory startups in the United States have generally done well. So it is not surprising that, as existing laboratory businesses come to market, equity investors are willing to pay strong prices to outbid others and buy an existing lab company.
This could mean that, in coming years, the two blood brothers may be outbid by deep-pocketed investors anytime an attractive laboratory company comes to market. It could also mean that, if equity investors overpay for the labs they buy, the two blood brothers could benefit by picking up those assets on the cheap—albeit some years later.