St John of God sale would stir up pathology sector

ST John of God Health Care's potential sale of its pathology division could have ramifications for the continued shake-up of the sector.

Speculation on activity in the pathology sector has swirled since private equity groups TPG Capital and Carlyle Group bought Healthscope for $2.7 billion last year.

But Sonic Healthcare buying SJOG's pathology unit would complicate Healthscope making a move on Primary Health Care, say analysts.

With Sonic, Primary and Healthscope making up 83 per cent of the competitive pathology space, any acquisition of SJOG is expected to face scrutiny from the Australian Competition & Consumer Commission.

Perth-based SJOG last week failed to deny it was looking at selling the division, valued at between $110 million and $150m.

The not-for-profit hospital and health services group is the second-largest pathology service provider in WA and a major player in regional Victoria.

The acquisitive Sonic, along with Primary and Healthscope, are expected to show strong interest given the "significant" synergies, the few remaining targets and the boost from volumes in the high fixed-cost pathology industry. On Citi's numbers, the unit could fetch between $190m to $260m, with bidding tension potentially driving the price north of $300m. "We estimate a price over $300m could still be about 2 per cent to 3 per cent earnings per share accretive for both Primary and Sonic," said Citi analyst Alex Smith.

But Primary is expected to face bigger hurdles from the ACCC than Sonic and Healthscope.

"A combined Primary-Healthscope pathology operation would be a positive for industry structure and hence for Sonic; however, if the Sonic-SJOG acquisition was successful, we would consider this less likely to be allowed to occur," said Merrill Lynch analyst Matthew Prior.

CBA analyst Natalie Kelly said Healthscope was the best placed to win approval from the ACCC for SJOG. Macquarie agreed, tipping Healthscope to be watching "closely".

SJOG's pathology assets include six labs and 55 collection centres in WA and 17 labs and 72 collection centres in Victoria.

For 2009-10, SJOG's pathology business generated $109m in revenues and $11m in EBITDA, with margins declining on the previous year because of government funding cuts.

CBA last week also downgraded Primary shares to a sell, partly because of cost pressures in its pathology division.

But Ms Kelly expected hot interest in SJOG's pathology assets and said while Sonic could comfortably fund the deal, Primary may require loan funding, assuming it fails to sell its software business, HCN.