Sonic Pays $180 Million In Acquisition of AEL

Purchase of American Esoteric Laboratories puts Sonic Healthcare into new U.S markets

CEO SUMMARY: In a transaction that was quietly negotiated, Sonic Healthcare Ltd. will purchase American Esoteric Laboratories, Inc. (AEL). News of the sale was released Friday and the sale may close in early January. Once it owns AEL, Sonic will have a major presence in Memphis, Tennessee. It will also gain regional laboratory operations in Tyler, Texas and Morristown, Tennessee.

FOR ITS NEXT ACQUISITION in the United States, Sonic Healthcare Ltd. will purchase American Esoteric Laboratories, Inc. (AEL). The sales agreement was announced last Friday.

Sonic Healthcare will pay US$180 million for AEL. Currently, AEL has annual revenues of approximately $US100 million. AEL is getting a good price for its lab business. Sonic indicates that it is paying a prospective multiple of 9.4 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Subject to regulatory approvals, both companies hope to complete the sale early in January.

With the acquisition of AEL, Sonic Healthcare enters the Tennessee markets of Memphis and Morristown. It gains an expanded presence in Texas because of AEL’s ownership of DRL Labs, Inc. in Tyler—a lab company AEL acquired just 12 weeks ago. (See TDR, October 16, 2006.)

Plans are to retain AEL’s existing management team without major changes. Once the sale is completed, Robert Connor, M.D., currently Chairman and CEO of Clinical Pathology Laboratories (CPL), Sonic’s business unit in Austin, Texas, will become CEO of AEL. AEL’s current Chairman and CEO is Brian C. Carr. Post-sale, he will provide consulting services to Sonic Healthcare.

Keeping the acquired lab’s management team in place is consistent with Sonic Healthcare’s business strategy. The company likes to acquire regional laboratory companies and operate them without fundamental changes in personnel and operational structure. If Sonic follows this formula, AEL laboratories will continue to conduct business under the AEL name.

AEL is the third laboratory acquisition Sonic Healthcare has done in the United States. In August 2005, it purchased Clinical Pathology Laboratories. Earlier this fall, it purchased Cognoscenti Health Institute of Orlando, Florida. (See TDRs, September 12, 2005 and September 4, 2006.)

More Lab Acquisitions

THE DARK REPORT predicts that 2007 will see several more laboratory acquisitions by Sonic Healthcare. The company has approached a number of independent laboratory companies and has been able to initiate sales negotiations with several of them.

Owners of independent laboratories consider Sonic Healthcare to be an attractive buyer, particularly when compared to the two blood brothers. First, Sonic has a demonstrated history of purchasing regional laboratory operations, then allowing them to continue to serve their communities under the same business name and using the same employees. Last December, during a trip to Australia, THE DARK REPORT saw this first hand during site visits to Sonic laboratories in Brisbane, Sidney, and Melbourne.

Second, because Sonic needs laboratory facilities, infrastructure, and experienced people in almost any market it enters here in the United States, sellers of independent laboratories know that, post-sale, Sonic will not close existing facilities and lay off loyal employees to consolidate operations as is often done by the national labs. This is a major selling point for many lab owners because they want their employees to have a continuing role after the acquisition.

Third, Sonic Healthcare is a company led by pathologists. It defines its core business mission to be advancing laboratory medicine in ways that support improved patient care. Leadership by pathologists is something many of the remaining regional laboratories here in the United States use to differentiate themselves from national lab providers within their local service areas.

In selling to Sonic Healthcare, American Esoteric Laboratories ends a relatively short business life. It was launched in April 2004 with $70 million in venture funding. (See TDR, April 26, 2004.) Originally organized for the purpose of developing a national reference and esoteric testing business, AEL found itself acquiring regional lab companies that provided routine testing services to office-based physicians. Its biggest acquisition was Memphis Pathology Laboratories in Memphis, Tennessee. This was a laboratory joint venture between MDS, Inc., Baptist Memorial Health Care, and Methodist Healthcare.

To date, AEL had only used $60 million of its $70 million capital base. Thus, an all-cash sales price of $180 million, with a multiple of 9.4 times EBITDA, gives existing lab owners an insight into one buyer’s valuation for an ongoing laboratory business.

Moving Fast In 2007

THE DARK REPORT believes that the acquisition of AEL will be the first of several significant regional lab company acquisitions by Sonic Healthcare during the next 12 months. As noted earlier, Sonic is known to be in discussions with a number of independent lab companies. Thus, Sonic’s business strategy will likely be to establish a presence in multiple regions during the next year.

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