Inside the pathology love triangle

The ACL-Healius merger may or may not go ahead, but either way the future looks bright for Sonic, the third party in this affair

- GRAHAM WITCOMB

They say falling in love is often a matter of “falling upwards” – desiring a partner with slightly better prospects than yourself.

That’s certainly true of the proposal by Australian Clinical Labs (ASX: ACL) to merge with Healius, a company almost twice its size.

ACL has proposed an off-market takeover, whereby Healius shareholders would receive 0.74 ACL shares for every Healius share. No cash would change hands. In effect, Healius shareholders would own 68% of the combined entity, with ACL shareholders owning the remainder.

The merger is a slam dunk from a strategic standpoint. Healius has a 32% share of Australia’s pathology industry, while ACL holds 17%; the merged entity would have a 49% share by revenue and operate more than half the collection centres. That would top Sonic Healthcare’s 42% market share and knock the current leader to second place in the pecking order.

Combined, ACL-Healius’s size would give it an edge when bidding for large tenders, and ACL’s management believes a merger would enable around $95 million of cost cuts and efficiency improvements.

That figure doesn’t seem stretched – around $26 million of savings are expected to come from improved purchasing of consumables, or roughly 5% of the combined companies’ consumable expenses, which is manageable.

What’s more, around 70% of ACL’s collection centre footprint is split between NSW and Victoria, the two states where Healius dominates. That lends itself to Healius’s “hub and spoke” model of plugging in more collection centres to its central labs and cutting duplicate costs. Higher efficiency is a sure thing.