Coming on the heels of its exit of American Medical Laboratories Inc., Chicago-based GTCR Golder Rauner is now in the process of selling its 4.6 million share stake of Dynacare Inc. to Laboratory Corp. of America Holdings. The deal on the table is for a per-share consideration of $11.50 in cash and .1164 shares of LabCorp common stock as part of a definitive merger agreement between LabCorp and Dynacare.
Dynacare is an independent provider of laboratory testing in North America. This is a $36 billion market. GTCR expects to close on the exit within the next 90 days and anticipates earning $120 million to $125 million on what was a $35 million investment initially.
The merger calls for LabCorp to acquire all of the outstanding shares of Dynacare for $23 per share, or a total of approximately $480 million in cash and stock. In addition, LabCorp will assume $205 million in Dynacare debt upon the closing of the transaction.
“We made a big investment in the clinical lab industry in 1997,” said Don Edwards, principal of GTCR. “We invested in the industry at a very tough time. It had gone through Medicare fraud issues and reimbursement pressure from managed care organizations, and the industry was just in disarray. Quest Diagnostics and LabCorp were the only public companies left, and they were both struggling.That has changed 180 degrees.”
Quest Diagnostics Inc., based in Teterboro, N.J., recently bought American Medical for $500 million, giving GTCR a roughly $205 million profit on its initial investment of $7.5 million. GTCR owned 60% of American Medical, which it bought in May 1997.
Quest Diagnostics and LabCorp, one of the first laboratories to embrace molecular diagnostics, are today among the top performers on the NYSE. Valuations on medical testing companies “have gone way up,” said Edwards, adding his firm believes now is a good time to sell even though the industry has good prospects for the future because, “We’re a private equity firm, and after five years, if you’ve made a profit, it’s time to sell.”
With this exit, GTCR is out of the medical laboratory testing industry altogether. Edwards said his firm may or may not invest in it in the future, as it is heavily consolidated now, compared with 1997. GTCR played no small part in that as Dynacare acquired 20 companies in five years, and American Medical made two acquisitions.
Indeed, under GTCR’s umbrella, Dyncare changed substantially. GTCR acquired a 5.9 million-share stake in Dynacare in May of 1997 (through its fifth fund) when it sponsored a going-private purchase of the company. GTCR sold 1.3 million shares of Dynacare in a secondary offering in November 2001. The firm originally had a 50% stake, with the Latner family of Toronto taking the other half.
In 1997, Dynacare “was a mostly Canadian company,” said Edwards, with only a small operation in the U.S., and a partnership strategy where it did joint ventures with hospital laboratories.
GTCR moved the company toward an acquisition strategy after forming a partnership with Harvey Shapiro, CEO, and the Dynacare management team.
“We liked the management team and their strategy to expand in the U.S. while the U.S. market was struggling,” he said. “We felt that with their joint venture strategy and management team they were well positioned to execute on a growth strategy in the U.S. while most other firms were retrenching.”
GTCR has been one of the most active private investors in this industry, and Edwards said both investments were made through the $520 million Fund V.
“These are obviously substantial returns for that size fund,” he said. “It will help us raise Fund VIII later this year.”
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