Quest Buying AmeriPath For $1.23 Billion
Medical-testing company Quest Diagnostics said Monday it will acquire diagnostic testing equipment company AmeriPath for $1.23 billion in cash, boosting Quest's cancer-detection business.

AmeriPath, controlled by Welsh, Carson, Anderson and Stowe IX L.P., provides dermatopathology, anatomic pathology and esoteric testing and has annual revenue of more than $800 million.

The total deal value, including about $770 million in assumed debt, comes to $2 billion, the companies said. Welsh, Carson had acquired AmeriPath in 2003 for $627 million.

Shares of Quest fell about 4% Monday. Analysts said investors were disappointed by the high price paid for a company that has struggled with tough competition, as well as disappointment that the acquisition may reduce the possibility that Quest may be taken private in a leveraged buyout.

"Our early view is negative, given (that) both AmeriPath and Specialty Laboratories, which was consolidated with AmeriPath, struggled as public companies," said Bank of America analyst Robert Willoughby.

"Competitors, including Quest Diagnostics and LabCorp of America, successfully made inroads into Specialty Laboratories' market share, contributing to disappointing organic growth," Willoughby said.

AmeriPath, which grew through multiple acquisitions, operates three divisions. Its Dermpath Diagnostics business has more than 80 dermatopathologists who interpret 2.4 million biopsies annually. Its anatomic pathology division focuses on gastroenterology, urology, oncology and women's health. Specialty Laboratories is a full-service clinical lab serving hospitals and physicians.

Quest said the deal would accelerate its revenue and earnings growth. The acquisition is expected to have minimal impact on Quest Diagnostics' 2007 earnings per share and mostly boost earnings in 2008, excluding deal-related charges.

"The deal appears to us to be a response to the lost (United Healthcare) deal," said Willoughby, referring to Quest's loss of a key insurance customer contract last year that accounted for about 7% of Quest's annual revenue.

The acquisition "ties up capital better deployed on small pathology and other services acquisitions that would position it better with managed care payers for more sustainable, capital efficient growth," Willoughby said.

Quest said it plans to pay for the transaction, refinance AmeriPath's existing debt, and the debt from the HemoCue acquisition completed earlier this year with the proceeds of a new $1 billion one-year bridge loan and a new five-year $1.5 billion term loan.