OMERS Sells LifeLabs For $1.35-Billion
Toronto-based pension fund Ontario Municipal Employees Retirement System (OMERS) has reached a deal to sell the country’s largest medical testing company, LifeLabs Medical Laboratory Services, to U.S.-based Quest Diagnostics Inc. for $1.35-billion including debt.
Secaucus, N.J.-based Quest is buying all of LifeLabs’ equity using cash and debt, and expects LifeLabs will generate about $970-million in annual revenue. LifeLabs will keep its brand, its Canadian headquarters and its management team after the acquisition closes, which is expected to happen by the end of the year, subject to regulatory approvals. Quest also plans to keep patients’ health data stored in Canada, according to a joint statement.
After the deal closes, however, Canada’s concentrated market for lab testing will be further controlled by U.S. owners. LifeLabs is Canada’s leading laboratory testing company and a household name for many people who have needed a blood test or a range of other screening, genetic and diagnostic procedures. The company, which employs 6,500 staff, performs 112 million tests each year at 382 collection centres and 16 laboratories in Ontario, British Columbia and Saskatchewan.
LifeLabs’ major domestic rival, Dynacare, is owned by one of the largest U.S. medical testing companies, Laboratory Corp. of America Holdings, commonly known as Labcorp. Together, LifeLabs and Dynacare form a key part of Canada’s lab-testing infrastructure, especially in the country’s most populous province, Ontario.
OMERS has owned LifeLabs for 17 years, and The Globe and Mail reported in January that the pension fund had put the testing company up for sale, drawing interest from multiple bidders. OMERS – which manages about $129-billion on behalf of approximately 600,000 Ontario public-service workers, including nurses, firefighters and police officers – pitched LifeLabs to potential buyers as an infrastructure-sector investment, with dependable revenues from providing medical services to an aging population.
The two leading contenders were Quest and Vaughan, Ont.-based Andlauer Healthcare Group, which runs a medical logistics business that delivers drugs to pharmacies and hospitals, and appeared to represent the best chance for LifeLabs to stay Canadian-owned.
By May, Quest emerged as the front-runner after a six-month auction, outbidding Andlauer by $100-million. The sale took months to negotiate because OMERS and the bidders were seeking to settle long-term contracts setting out the prices for tests with the Ontario Ministry of Health, which is LifeLabs’ largest customer. Other large clients include insurance companies, and clients have pushed laboratory testers and other medical suppliers to cut costs.
“Our purchase in 2007 and subsequent investments have helped LifeLabs grow into a great Canadian success story,” said Michael Hill, OMERS’s global head of infrastructure, in a statement. “Quest is uniquely equipped to expand the service offering at LifeLabs, bringing new innovations to this market while extending access for patients in Canada.”
An OMERS spokesperson declined to comment beyond the company news release.
Hannah Jensen, a spokesperson for Ontario Minister of Health Sylvia Jones, said in an e-mailed statement that “LifeLabs has ensured the Ministry that services will continue to be available for people across the province and there will be no changes to any staffing.”
The Saskatchewan Health Authority is nearing the end of a seven-year contract with LifeLabs, signed in 2018, for collection services in Saskatoon and Regina. The province’s Ministry of Health said in a statement to The Globe that it is “optimistic the quality service provided by LifeLabs over the last six years will continue under the new ownership group.”
Laboratories in Canada “are hurting right now,” suffering in particular from a shortage of qualified laboratory professionals to meet demand for testing, said Christine Nielsen, chief executive officer of the Canadian Society for Medical Laboratory Science, in an interview. But Quest is a sophisticated company with experience operating in a complicated U.S. regulatory system and could have the capacity to make investments that would expand community testing to more municipalities and provinces, she added.
“There’s no alarm bells for us with the sale of LifeLabs to Quest,” Ms. Nielsen said. “It’s a known entity in the community and we’re confident that the regulatory structure will be respected.”
LifeLabs and Quest already have business relationships through which Quest provided some advanced tests, and LifeLabs participated in a Global Diagnostic Network to share expertise, led by Quest.
“This transaction is predicated on our strong belief that we can help LifeLabs accelerate growth and improve health care,” Jim Davis, Quest’s chairman, chief executive officer and president, said in a company statement.
Evercore and CIBC World Markets Inc. served as financial advisers to OMERS, which had legal advice from Blake, Cassels & Graydon LLP. McCarthy Tétrault LLP advised Quest.
Earlier this month, OMERS issued a press release on this deal:
Secaucus, NJ and Toronto, Canada — July 3, 2024— Quest Diagnostics (NYSE: DGX), a leading provider of diagnostic information services, today announced a definitive agreement with OMERS to acquire LifeLabs, a trusted provider of community laboratory tests for millions of Canadians, for a value of approximately CAN $1.35 billion (approximately USD $985 million), including net debt.
“Quest has supported laboratories, hospitals and academic centres in Canada with specialized testing services for over two decades, including during the COVID-19 pandemic,” said Jim Davis, Chairman, CEO and President, Quest Diagnostics. “This transaction is predicated on our strong belief that we can help LifeLabs accelerate growth and improve healthcare. We are committed to working with the LifeLabs team to ensure service continuity and enhance access and innovation to meet the needs of Canada’s growing and aging population.”
LifeLabs will retain its brand, Canadian headquarters, and management after the acquisition is closed. Quest will provide LifeLabs with new expertise, innovations and resources to strengthen the services provided by LifeLabs’ more than 6,500 employees. This will include improved online appointment scheduling and faster patient service centre processing. Quest also expects to help accelerate LifeLabs’ data security enhancements while ensuring Canadian patients’ health data remains in Canada.
“OMERS is proud to have supported LifeLabs’ growth over the last 17 years. Our purchase in 2007 and subsequent investments have helped LifeLabs grow into a great Canadian success story,” said Michael Hill, Executive Vice President and Global Head of Infrastructure of OMERS. “Quest is uniquely equipped to expand the service offering at LifeLabs, bringing new innovations to this market while extending access for patients in Canada.”
Quest has recently introduced several new tests requiring specialized skills, science, and technology, including in Alzheimer’s disease, women’s health (particularly prenatal and hereditary genetics), oncology and advanced cardiometabolic health.
“Quest is the right partner to build on the strengths of LifeLabs and align with our strategic path, which focuses on enhancing the accessibility and quality of services that we provide to millions of Canadians,” said Charles Brown, President and CEO, LifeLabs. “We know and respect Quest, as we share similar cultures and values and a productive test-reference relationship. Together, we’ll grow LifeLabs and provide more Canadians with access to the advanced diagnostics they rely on, closer to home. We sincerely thank OMERS for its investment, leadership, and valued collaboration over 17 years.”“Under OMERS ownership, LifeLabs has become a market leader in Canada with a broad range of testing capabilities,” said Matthew Mendell, Managing Director, OMERS Infrastructure. “We are pleased that Quest will continue to develop and deliver these meaningful offerings to Canadians.”
The two companies already have an established relationship. Over the past five years, LifeLabs has participated in the Quest-led Global Diagnostic Network, which connects 12 of the leading diagnostic testing labs globally to broaden testing access and share expertise. LifeLabs and Quest also have a reference relationship through which Quest provides access to select advanced diagnostic tests.
Transaction DetailsQuest will acquire 100% of the equity of LifeLabs and expects to fund the acquisition through cash on hand and debt. The company expects the transaction to generate approximately CAN $970 million (approximately USD $710 million) in annual revenues and to be slightly dilutive to GAAP earnings per share (EPS), due primarily to amortization of intangibles and other items, but accretive to adjusted EPS in the first 12 months after closing. The transaction meets all of Quest’s criteria on growth, profitability and returns. The parties expect to complete the transaction by the end of the year, subject to certain customary closing conditions and approvals, including Canadian regulatory approvals. Additional terms were not disclosed.
AdvisorsMcCarthy Tétrault LLP served as legal advisor to Quest Diagnostics. Blake, Cassels & Graydon LLP served as legal advisor to OMERS. Evercore and CIBC Capital Markets served as financial advisors to OMERS.
About LifeLabsLifeLabs is Canada’s leading provider of laboratory diagnostic information and digital health connectivity systems, enabling patients and healthcare practitioners to diagnose, treat, monitor and prevent disease. We are a committed innovator in supporting Canadians to live healthier lives, operating Canada’s first commercial genetics lab, and the country’s largest online patient portal, with more than 8 million Canadians receiving their results online. LifeLabs has been named one of Canada’s Best Employers (2021, 2022 and 2023) and Best Employers for Diversity (2022 and 2023) by Forbes and recognized for having an award-winning Mental Health Program from Benefits Canada. Learn more at lifelabs.com.
About OMERS
OMERS is a jointly sponsored, defined benefit pension plan, with 1,000 participating employers ranging from large cities to local agencies, and over 600,000 active, deferred and retired members. Our members include union and non-union employees of municipalities, school boards, local boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. OMERS teams work in Toronto, London, New York, Amsterdam, Luxembourg, Singapore, Sydney and other major cities across North America and Europe – serving members and employers, and originating and managing a diversified portfolio of high-quality investments in bonds, public and private credit, public and private equities, infrastructure and real estate.
About Quest DiagnosticsQuest Diagnostics works across the healthcare ecosystem to create a healthier world, one life at a time. We provide diagnostic insights from the results of our laboratory testing to empower people, physicians and organizations to take action to improve health outcomes. Our nearly 50,000 employees understand that, in the right hands and with the right context, our diagnostic insights can inspire actions that transform lives and create a healthier world. www.QuestDiagnostics.com
Alright, this sale took place three weeks ago so I am late here.
First, no big surprise, I wrote about OMERS looking to sell LifeLabs back in January.
It took a bit longer to iron out details but Quest emerged as the new owner.
LifeLabs was a great investment for OMERS Private Equity, they grew this company nicely over the last 17 years and decided its time to realize on its value.
Why now? I suspect the timing is there and Quest really wanted this asset.
Also, OMERS took a big hit on Thames Water when it wrote off its stake back in May so it needs to make some returns to cushion the blow of that loss.
Again, this is all about portfolio management and this is why it's important to have a well-diversified portfolio across asset classes, sectors, geographies and strategies.
And to be clear here, OMERS didn't sell LifeLabs at a big discount to cushion the blow of Thames Water, they got fair value for this asset.
In other related news, Craig McGlashan of PE hub Europe recently interviewed Jonathan Mussellwhite, head of Europe at OMERS Private Equity to discuss valuation outlook and deal plans:
Everyone in private equity knows that for dealmaking to get back to the heights of a few years ago, the valuation mismatch between buyers and sellers needs to narrow. But just where exactly will valuations end up and what are the factors that need to be plugged into the equation? That was one of the topics I discussed with Jonathan Mussellwhite, head of Europe at OMERS Private Equity, along with his firm’s investment plans for the next 18 months, how it plans to get ahead of an expected wall of deals in 2025 and more on OMERS’ general strategy.
Turning to signed deals, mid-market private equity firm Duke Street has agreed to carve out a provider of medical imaging equipment from Philips.
We finish with a look at a couple of deals that have just closed, one involving a company with backing from firms including Intermediate Capital Group, Sofinnova Partners, Andera Partners, Kurma Partners and EQT Life Sciences, and the other involving Mutares.
Pricing questions
We’ve written a tonne on PE Hub Europe about the causes for the drop in dealflow from the heady days of 2021 – valuation mismatches between buyers and sellers, higher cost of debt, and more besides.
But while there are signs the valuation gap is narrowing, exactly where multiples will end up is an open question, Jonathan Mussellwhite, head of Europe at OMERS Private Equity, told me.
About two-thirds to three-quarters of intermediaries OMERS speaks to believe 2025 will be when deals pickup in earnest, rather than the second half of 2024.
“The question, when and if they do come, is where price expectations are,” said Mussellwhite. “And whether the focus on DPI, which has now become almost as important, it seems, as IRR, means that there is more of a compromise between buyer and seller for expectations.
“That’s the big question. How do these different factors balance out? You’ve got LPs that want capital back, you’ve got GPs who want to deploy capital, you’ve got management teams who will be expecting a rotation of capital, you’ve got what’s probably been a slightly more challenging economic market over the last 12 months and how that factors through into underlying earnings.
“What does all of that mean for pricing in multiple?”
Nearer term, dealmaking should be aided by leverage being “readily available”, with the cost of debt having dropped by more than 100 basis points over the last six months, said Mussellwhite.
“There are definitely more deals starting to come to market at the moment. But it’s a continuation of what we have seen for the last 12 months, which is very high-quality businesses can transact at good prices, certainly in line with historic multiples achieved by those businesses in years past. Businesses that are not of that quality have not been transacting.”
Check out the full interview to learn about OMERS’ deal plans over the next 18 months, how it is prepping to deal with an expected wall of deals coming to market next year and more about its investment and exit strategy.
Below, the Healthwise Show reports Quest Diagnostics acquires LifeLabs, paving the way for a new era for Canadian healthcare.
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