Merged path

HEALIUS TAKEOVER OFFER 

Need To Know

• Australian Clinical Labs (ACL) announced an off-market takeover to acquire Healius (HLS) shares, by offering 0.74 ACL shares for every 1 HLS share
• Merger expected to unlock ~$95m cost synergies and de-risk operational turnaround at HLS
• Potential value uplift of ~$2.1b

As had been rumoured for some time, ACL has lobbed a bid to merge with HLS, expected to create Australia’s largest pathology provider with more approved collection centres than any other provider. The offer provides HLS shareholders with 0.74 ACL shares for every 1 HLS share held, which does not represent any premium based on recent trading. The merged group would comprise of 68% existing HLS shareholders and 32% existing ACL shareholders.

Largest pathology provider. The merged group would shift from 96 HLS labs to a total of 171, and from 2,087 collection centres to 3,413. The increased size would give the merged entity a more flexible balance sheet and be better positioned to pursue future growth opportunities. The larger platform should also allow it to better compete with Sonic Healthcare (SHL) and other smaller providers.

Cost synergies. ~$95m worth of cost synergies have been identified, with $31m from lab consolidation, $16m from logistics optimisation, $26m in procurement benefits and $22m from back-office and support. $55m+ is expected to be captured in the first two years, with the remaining $40m expected to be realised between two and four years.

Valuation uplift. ACL have posited a potential ~$2.1b valuation uplift for the combined entity, given the margin improvement from potential cost synergies. This would be driven by a valuation re-rate from earnings diversification, enhanced scale, improved balance sheet, liquidity, and potential inclusion into the ASX100 index.

Investment View

The merger is still subject to several conditions, including ~90% acceptance by HLS shareholders and ACCC/FIRB approval. We expect that this will likely be the starting point for a longer conversation and process. The merger itself has sound strategic merit with identifiable cost synergies and scale benefits and is largely opportunistic on a depressed HLS share price. We are sceptical of the proposed valuation uplift which would require a significant multiple re-rate for HLS, which would only be driven by demonstratable cost outs and successful turnaround of margins which were impacted by the pandemic. We retain our hold recommendation until more information is available from the regulators regarding the likelihood of the merger proceeding. HLS has yet to formally respond to the bid.

Figure 1: Merged entity would be much more diversified across the country