No Enthusiasm To Combine ACL & Healius

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A takeover bid for Healius by Australian Clinical Labs has been greeted with very little enthusiasm, if any.

-Australian Clinical Labs' takeover offer for Helius seen as opportunistic
-Potential hurdles range from Healius board and shareholders to the ACCC
-Brokers note the suitor issued a 'soft' downgrade for FY23

By Mark Woodruff

Late last year, rumours of a takeover bid for Helius ((HLS)) circulated in the media, following the departure of CEO Malcolm Parmenter and the sale of the company’s day surgeries.

While those rumours centred on an infrastructure investor, instead smaller sized competitor Australian Clinical Labs ((ACL)) has emerged as a bidder. Jarden feels now the genie is out, other interested parties might pop up.

The Underweight-rated broker considers the ‘nil premium’ takeover offer is opportunistic and unlikely to proceed. It’s felt the highly conditional bid, which is at a -4.2% discount to the last trading price, overstates the upside from a merged entity.

While Morgans feels management’s aim to unlock -$95m in synergies across four years is realistic, the broker agrees the approach looks opportunistic.

This broker also points to the lack of premium offered in the all-scrip off-market takeover bid of 0.74 shares in Australian Clinical Labs for each Helius share.

Morgans notes potential for scale benefits and cost savings, though feels any hiccups in the process or divestment of assets may impact on the returns achieved. The broker's rating is lowered to Hold from Add.

Management at Australian Clinical Labs expects the merged group to become the largest pathology provider in Australia, surpassing Sonic Healthcare ((SHL)) with over 3,400 collection centres.

The company predicts implementation of cost synergies will lead to one-off cash costs of around -$70m incurred progressively over the four-year integration period and claims the merger should deliver $2.1bn in aggregate potential value uplift.

The offer equates to around $3.66 per Helius share (32% above the share price), according to Macquarie (Outperform), which compares to a $4.87 valuation by the broker on a standalone basis and $4.93 as part of a newly merged entity.

These calculations highlight to this broker modest upside for Helius shareholders as part of a merged entity, should Helius deliver on its internal margin targets.

Morgan Stanley (Underweight) notes the strategic execution track record at Helius has been disappointing and suggests shares without the offer are fully valued, while also noting the takeover bid offers synergy potential of the same magnitude as the company’s existing sustainable improvement program.

This broker concludes upside potential for Helius shares would most likely derive from an outside source, like the shared synergies proposed by Australian Clinical Labs.

The offer, which is scheduled to close on September 29, is subject to a 90% minimum acceptance condition from Helius shareholders, FIRB and ACCC clearance and approval by shareholders of Australian Clinical Labs.

Potential hurdles for the takeover proposal

Jarden envisages several sticking points to a successful takeover by Australian Clinical Labs including a dim view adopted by the ACCC towards the merger of the number two (Helius) and three pathology companies in Australia.

Also, the top three Helius shareholders represent 29% of the register and individually could block the deal in light of the 90% minimum acceptance condition, explains the analyst.

Moreover, the broker points to a “soft downgrade” by Australian Clinical Labs as it was laying out the mechanics for the merged entity. FY23 earnings (EBIT) guidance of $68-74m, compares to market consensus expecting $74m.

The average target price for Helius in the FNArena database is $3.13, suggesting 2.9% upside to the latest share price. There is only one Buy (or equivalent) rating, three Holds and two Sell ratings. [Note: UBS, which has just acquired Sell-rated Credit Suisse, doesn’t cover Helius].

For Australian Clinical Labs there are two Buy (or equivalent) ratings and an average target price of $3.95, suggesting 7.3% upside to the latest share price.

Morningstar, through Ord Minnett, is of the view the offer made materially undervalues Healius as a stand-alone operations, let alone when merger synergies are taken into account. Management at Healius hasn't exactly excelled in the transitioning away from pandemic testing the analyst acknowledges, but Morningstar sticks with the view Healius remains well-positioned to benefit from operating leverage as activity levels return back to pre-covid normal.

Morningstar has little doubt the Healius board will reject the proposal.

As a combination between the two companies would command a market share of 40% across Australia, including 50%-plus in Victoria, Western Australia and the Northern Territory, Morningstar also believes the ACCC will oppose the deal.

Outside of the database, Underweight-rated Jarden has a $2.66 target for Helius, while Goldman Sachs (Neutral) has a $3.40 target for Australian Clinical Labs.

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