In One of Largest Deals in Recent Years, Quest Acquires Solstas Lab Partners for $570 Million

Looking to bolster revenue that has not moved upward since 2011, Quest Diagnostics has shelled out $570 million to acquire Solstas Laboratory Partners. The deal, announced earlier this month, is the largest of 2014 so far and likely eclipsed any deal that was consummated in 2013, for which there was little data in terms of purchase prices. The biggest similar deal with an actual purchase price attached took place in August 2012, when LabCorp acquired MedTox Scientific for $241 million. Solstas, a large regional player that operates in nine states in the Southeast, including Virginia and Georgia, is owned by private equity firm Welsh, Carson, Anderson, and Stowe. It acquired Spectrum Labs in 2010, then merged it with Carilion Labs to create Solstas. “This acquisition represents an exciting opportunity for Quest and Solstas as well as our patients and customers in the region. Solstas has excellent client relationships and local presence in the Southeast, and we expect to build on the value of these assets with our broad and innovative test menu, scientific expertise and health IT solutions,” said Quest Chief Executive Officer Steve Rusckowski in a statement. Quest disclosed few other details about the transaction, which is expected to close before the end of the second quarter. Company spokesperson Wendy Bost observed that “we are just beginning our plans to make the most of this exciting opportunity” and declined to say if there would be any job cuts at Solstas, which has about 4,000 employees, or if the company would continue to operate under its own name. The deal does appear to finally nudge Quest’s revenues upward. Company officials say the transaction will add about 5 percent to its revenues on an annualized basis and will give a mild boost to earnings, perhaps as much as 10 cents per share, or about a 2.5 percent increase. Based on its recently issued guidance for 2013, that translates to about $350 million in 2014. Industry observers suggest the numbers indicate Solstas has been struggling in recent years. Christopher Jahnle, managing director for Haverford Healthcare Advisors in Paoli, Pa., noted that Solstas has acquired a half-dozen labs with about $100 million in cumulative revenue since 2010 but that that same amount appears to have eroded from the company’s top line. The purchase price—which represents about 1.6 times annual revenue, also surprised Jahnle and other observers. The typical multiple is closer to twice annual revenue. “Solstas’ managed care contracts will likely look different under the Quest managed care umbrella; thus, we are not surprised by a lower revenue multiple,” wrote Amanda Murphy and J.P. McKim of William Blair & Co. in a recent report. “You have to wonder if [Solstas’s ownership is] barely getting their money out of this,” Jahnle said, noting that the discounted price is likely the reflection of both eroding revenue and difficulty integrating recent acquisitions. They include Oracle Diagnostic Laboratories, Hayes Clinical Laboratory, Southern Diagnostic Laboratories, Nextwave Diagnostic Laboratories, Wilmington Pathology Laboratory, and Select Diagnostics. And acquisition or not, Quest still appears shaky for 2014. “Despite the recent acquisition announcement of Solstas Lab Partners, we remain cautious on Quest heading into the [final 2013 earnings report] as we believe shares could trade lower,” wrote Bradley Maiers and Kevin K. Ellich of Piper Jaffray in a recent report. The two analysts believe Quest’s upcoming guidance for 2014 could actually be lower than the current consensus of $4.20 a share. Takeaway: Quest’s challenge to grow its revenue stream has prompted it to make one of the biggest acquisitions in the lab sector in recent years.