Shareholders Hugely Oversubscribe LabCorp’s $500 Million Offering

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COMMERCIAL LABORATORIES may be regaining favor on Wall Street.

Laboratory Corporation of America’s $500 million convertible stock offering not only sold out, but was over-subscribed by a huge amount.

In addition to the 10 million convertible shares offered, subscription agreements and payments for an additional 3.98 million shares were tendered. Investor response to LabCorp’s offering surprises many industry observers. However, when viewed in tandem with the surprisingly strong price for the shares of Quest Diagnostics, Inc., this could be an early vote of confidence in the financial turnaround of the national laboratories.

“We are pleased at how successful this offering was,” declared Pamela Sherry, Investor Relations Director at LabCorp. “It is a strong demonstration of support from our shareholders.”

The $500 million will be used in three ways. “First, all fees and expenses for the offering will be deducted,” explained Sherry. “Second, the $187 million loan from Roche, along with accrued interest, will be repaid. Third, all funds remaining will be used to reduce principal on our outstanding bank debt.”

An interesting twist to this situation was the disclosure, on March 31, 1997, that Berkshire Hathaway owned a 4.1% stake in LabCorp. Because of Warren Buffet’s connection with Berkshire Hathaway, many investors were curious as to why Berkshire Hathaway took a position in LabCorp.

“The Berkshire information released on March 31, 1997 reflects stock purchases up to a year old,” responded Sherry. “We do not know if Berkshire Hathaway still holds this position, since there has been no subsequent disclosure about a reduction or increase in LabCorp holdings by Berkshire Hathaway.”

Not including the Roche loan, LabCorp’s first quarter financials disclosed a total of $1.077 billion in credit obligations, comprised of $693.8 million in short-and long-term debt plus a revolving credit facility of $384.0 million. It is estimated that approximately $300 million of the offering proceeds will be applied to retire the existing bank debt.

LabCorp also reported another milestone during first quarter, 1997. Revenue per accession increased 1.6% over the same quarter in 1996. It was the first time in a number of quarters where revenue per accession did not decline. The increase was attributed to better pricing discipline on new contracts and increased price schedules.

These early signs of a turnaround do not mean that LabCorp will soon return to robust financial health. Future cuts in Medicare funding and managed care’s ongoing erosion of laboratory reimbursement will maintain financial pressure on LabCorp, Quest Diagnostics and SmithKline Beecham Clinical Labs.

What can be concluded is that LabCorp’s existing shareholders have great confidence in the future of the company. They just bet $500 million that LabCorp can succeed!

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