Sonic Makes Big Play In AP With CBL Path Buy

Sonic Healthcare, Ltd, will pay $123.5 million to acquire CBL Path and its AP testing capabilities

CEO SUMMARY: With the announcement that it will purchase CBL Path, Inc., Sonic Healthcare, Ltd., becomes the latest public laboratory company to buy a sizeable presence in the national anatomic pathology (AP) marketplace. For CBL Path, founded in 2003 by ex-Dianon executives and sales professionals, it is the exit strategy for which they have long planned. CBL Path’s sustained growth during the past seven years demonstrates why investors are eager to buy into the anatomic pathology marketplace.

LAST WEEK, IT WAS ANNOUNCED THAT Sonic Healthcare Ltd., of Sydney, Australia, would pay US$123.5 million to acquire CBL Path, Inc., the anatomic pathology (AP) company based in Ocala, Florida.

The sale is expected to close by year end. When it does, it will end the short, seven-year business life of CBL Path. It was 2003 when CBL Path launched business operations. It was formed by a group of executives and sales professionals who had previously worked at Dianon Systems, Inc., prior to its acquisition by Laboratory Corporation of America in January, 2003. (See TDRs, November 18, 2002, and February 10, 2003.)

Currently, CBL Path is 40% owned by Galen Partners, a private equity firm based in Stamford, Connecticut. The balance of CBL Path’s ownership is held by management, staff, and other private investors.

CBL Path’s timing coincided with the strong expansion in anatomic pathology  testing that took place during the past decade. It maintained a steady rate of growth in specimen volume and revenue during the past seven years. Sonic Healthcare disclosed that CBL Path has annual revenues of approximately $80 million. That represents an average rate of growth for CBL Path of about $11.5 million per year between 2003 and 2010.

For Sonic Healthcare, the deal is significant because it immediately propels Sonic into the first rank of national anatomic pathology companies in the United States. It also moves Sonic a big step forward toward the goal of attaining $1 billion in revenue from its laboratory operations in the United States.

At the end of its fiscal year of June 30, 2010, Sonic stated that it had revenue from U.S. operations totaling US$766 million. Adding CBL Path’s annual revenue to that figure would bring Sonic’s total U.S. revenue to $846 million per year.

Another closely-watched aspect of this acquisition will be the price Sonic has agreed to pay for CBL Path. Sonic Healthcare is known to be a careful buyer of clinical laboratories and pathology groups. For, example, during the past two years, it has been outbid for several prime laboratory businesses that were offered for sale.

In studying these transactions, THE DARK REPORT believes that Sonic Healthcare is typically outbid by other buyers when the motive of the seller is primarily to maximize the sales price of the laboratory to be sold. However, when the seller has other considerations, such as protecting the jobs of long-serving lab employees and continuing the name of the laboratory to be sold, Sonic Healthcare is often selected to be the buyer.

In these situations, Sonic’s federation business model works to its advantage. Sonic generally continues to operate the newly-acquired laboratory under its same name and will retain both the management team and laboratory staff without major changes. For some sellers, these are important considerations.

Led by a Pathologist as CEO

Another element should not be overlooked as to why Sonic prevails in some laboratory bidding situations. Sonic consistently points out that it is a laboratory company led by a CEO who is a pathologist. That fact makes it unique among public laboratory companies operating in the United States. Sonic Healthcare also discusses how its corporate culture respects the clinical mission behind laboratory testing and that can be an influencing factor for some sellers.

These observations will help pathologists and pathology practice administrators better understand some factors which may have contributed to CBL Path’s decision to sell to Sonic Healthcare over other interested bidders. The purchase price is $123.5 million. As outlined by Sonic Healthcare, this represents a multiple of approximately eight times EBIDTA (earnings before interest, depreciation, taxes, and amortization). That implies an EBITDA of $15.5 million, based on CBL Path’s annual revenues of about $80 million.

1.5 Times Annual Revenue

The $123.5 purchase is also about 1.5 times annual revenue. Both of these figures point to a sales price in line with a number of laboratory acquisitions during the past 36 months.

It is reasonable to speculate that several strategic factors helped tip the scales in Sonic’s favor as the eventual buyer. First, it would intend to operate CBL Path under its existing name, existing management team, and existing network of laboratory facilities. That is consistent with its federation model. For a management team interested in continuing with CBL Path post-acquisition, this would be highly attractive.

Second, both buyer and seller have commented on the expected synergies that would come from combining the two operations. Sonic identified these synergies in its press release, writing that “Sonic currently has clinical laboratory operations in eight of the 10 States from which the majority of CBL Path’s revenue is sourced.”

At a minimum, the Sonic/CBL Path transaction sets up two changes in today’s lab testing marketplace. First, it immediately gives Sonic Health a substantial volume of AP specimens and revenue. Second, it removes one more independent laboratory company from the competitive marketplace.

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