Australia | Aug 14 2007
By Chris Shaw
When Sonic Healthcare (SHL) first expanded into the German market it was seen as a beachhead acquisition, something to establish the company in that market but offering little tie-in with its existing operations.
This has now changed as the company has announced the acquisition of Bioscientia for 190 million euros in a deal that will see it bring the new company into the fold of its existing Shottdorf assets, which as Merrill Lynch notes will create the largest corporate pathology player in the German market.
While not getting a steal in paying 9.7x EBITDA for Bioscientia the brokers covering the stock are generally positive on the company’s move as it provides scope for significant synergies to be generated, Macquarie noting the company’s increased scale in Europe in general and Germany in particular should serve to enhance the synergies achievable from any future expansionary moves in the region.
Estimates on just how earnings accretive the acquisition will be vary from broker to broker, Macquarie estimating it adds only 1.2% to FY08 earnings but 6.2% in FY09 and 10.1% in FY10 as the synergies really kick in. The broker is forecasting earnings per share (EPS) of 67.1c this year, 72.5c in FY08 and 84.7c in FY09, while UBS sees the deal as adding 2.8% to its FY08 forecast and 4.8% in FY09 so it estimates EPS of 69c, 84c and 96c respectively.
These forecasts compare to median market estimates for the stock according to Thomson One Analytics of 67c, 77c and 86c, while ABN Amro is at 64.6c, 81.1c and 92.6c after minor increases to its forecasts.
Most of the experts who cover the stock don’t see this as the company’s last deal either in Germany or Europe generally, UBS pointing out the German market in particular appears ripe for further consolidation.
For the company to partake of this an equity raising is expected as the current deal brings gearing to a relatively full level, but according to GSJB Were any impact on the share price as a result of any issue would represent a potential opportunity to get set in the stock for the longer-term.
Again estimates of the size of any capital raising vary, Merrill Lynch suggesting $200-$250m should be enough and GSJB Were seeing scope for as much as $300-$500m to be raised. Either way, the impact on earnings per share is not expected to be great, Weres estimating a 1% impact for each $100m raised.
Following the announcement of the acquisition Merrill Lynch has upgraded its rating to Buy from Neutral as on its numbers the upside valuation case from the German move results in a valuation of $17.70.
ABN Amro has similarly upgraded to Buy from Hold on the likelihood of further earnings accretive expansion in Germany, the broker echoing the sentiments of UBS with respect to that market offering a number of opportunities.
These changes mean the stock is now rates as Buy seven times and Hold twice in the FNArena database, with an average price target of $17.00, up from $16.88 prior to the acquisition and in line with the median price target according to Thomson One.
Shares in Sonic this morning are stronger despite a weaker overall market and at 10.40am were up 41c or 2.8% at $15.00.