Analysts view LabCorp buyout as increasingly likely

LabCorp ($LH) may insist that it isn't for sale, but analysts told Bloomberg that a sale of the diagnostics and lab test provider appears increasingly likely, thanks to the Affordable Care Act.

Consider the following: Millions of new patients will gain health insurance coverage because of the law. And private equity firms are on the lookout for health-care investments they can close before millions of new customers gain health insurance. So how does this make LabCorp a target, you might ask? Consider that with some 32 million Americans will health insurance for the first time and their doctor visits (along with an onslaught of aging baby-boomers) will generate a big boost in demand for diagnostics and other lab tests, the article correctly points out. So even though LabCorp denied rumors that it's an acquisition target, many observers aren't buying it.

Bloomberg's shares jumped Aug. 1 based on rumors that a private equity-firm was looking to buy the company, and LabCorp quickly issued a denial. They remained at elevated levels ever since, Bloomberg notes, closing at $87.51 on Aug. 23, even though LabCorp (and rival Quest Diagnostics) have scaled back their 2012 revenue projections.

"Would it make sense for private equity to look at LabCorp? My answer is a resounding 'Yes,'" Maxim Group analyst Anthony Vendetti told Bloomberg. "I see the Affordable Care Act as a positive for this company and I am sure private equity does as well."

Kevin Ellich, an analyst with Piper Jaffray, notes in the article that the aging population also makes LabCorp a viable target, because it and other lab companies will gain extra business from that element as they seek more diagnostic tests. Ellich told Bloomberg he sees the potential for a sale exceeding $100 per share, based on LabCorp's Aug. 23 closing price. Piper Jaffray also predicts that 70% of the new post-health reform patient doctor visits will result in a diagnostic/laboratory test, according to the story.

Even beyond those factors, LabCorp's free cash flow--$700 million of cash over the last 12 months, after expenses--may also induce private equity firms to buy, Leerink Swan analyst Jason Gurda told Bloomberg. The company, he noted, is a "stable, high-margin business with great cash flows."

Not everyone agrees with analysts' assessment. Poliwogg fund manager Les Funtleyder said in the Bloomberg piece that the company might be too big to buy. He also argued that lab testing rates will likely fall as insurance companies and hospitals seek to reduce costs.

- read the Bloomberg story