Labco is one of the leading groups in the European clinical laboratory services market and is a market leader in Spain and Portugal based on 2013 revenues. The company is one of the top two leaders in France and in Italy, where Labco has a strong presence in medical imaging and ambulatory services. They also have a significant base in Belgium.
As of 31 December 2014, Labco provided services through its network of approximately 165 laboratories in seven European countries and approximately 1,000 sampling centres. Furthermore, Labco also provides clinical laboratory testing services in Eastern Europe, Latin America, the Middle East and North Africa.
The company’s growth strategy is based on leveraged acquisitions of small to medium sized laboratories, whereby their owners become shareholders of Labco. This model allows Labco to achieve large economies of scale while maintaining the motivation and commitment of its local medical professionals.
The amount of diagnostic and analysis costs covered by public healthcare organizations varies from one country to another. Although the end client is always a patient, Labco’s services may be paid for by private health insurers, employers, hospitals, other laboratories or patients themselves.
The European clinical laboratory services market is characterized by resilient growth and barriers to entry. The market has proven relatively resilient to economic cycles and is expected to continue benefiting from favourable demographic factors. By demographic factors we mean an aging population, the increased frequency of long-term illnesses requiring recurring tests as well as increased levels of disposable income, which tend to support greater healthcare expenditure. Testing volumes have also increased as the medical profession increasingly focuses on the prevention, early detection and treatment of chronic and severe illnesses and increasingly relies on clinical testing for more accurate diagnoses.
Significant portions of the European clinical laboratory services market, including the French, Spanish, Portuguese and Italian markets, remain fragmented. These markets present opportunities for consolidation and growth.
On 28 May 2015, buyout firm Cinven agreed to acquire Labco SA for an enterprise value of €1.2bn. Cinven is a leading private equity provider for large European buyouts, having led transactions totalling in excess of €70 billion. Since 1996, Cinven has completed more than 50 buyouts with an enterprise value per transaction of more than €500 million in 10 countries across Europe. Cinven focuses on business services, consumer, financial services, healthcare, industrials and technology, media and telecommunications.
As a result of this announcement, Labco, under the newly formed holding company Ephios Bondco PLC, successfully placed a 6.25% 7-year bond issue. In view of this, we imminently expect the announcement that the existing 8.50% 2018 will be called.
Labco has a positive track record of maintaining stable EBITDA margins on revenue growth, which partially offsets negative pricing trends. Given that Labco consolidates upon acquisitions, we are of the opinion that it is better positioned to absorb this pressure than smaller laboratories. Despite the longer-dated debt maturity profile and acquisitive strategy, we would expect any future improvement in leverage to come from higher profitability rather than from any reduction in debt. Key credit metrics have remained somewhat stable despite the aggressive acquisition model, lending itself primarily to increased profitability and follow-through on synergising and consolidating acquisitions.
We view Labco's cash generation as transparent and is minimally impacted by default or delayed payment fears as their source of revenues comes from private and public health care insurers. Labco's sound position as a consolidator of small companies in a growing underlying market also bodes well for the prospects of the France-based laboratory. From this point forth, we would expect Labco to persist in its consolidation phase via the acquisitions of small and medium sized laboratories.
This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.