Who really makes money out of labs?
Blaise Mentha, Jean-Louis Oger, Eric Souetre – it is striking how charismatic entrepreneurs serially trouser millions from diagnostic labs. It is much harder for private equity to make money from lab groups. Why? And does the same hold true for other healthcare sectors?
The story of the last decade in labs has been one of charismatic entrepreneurs enticing lab doctors into selling their businesses and forming chains. These chains were then sold on to external investors – often at the height of booms. You can spot a similar trend in other industries – it is very much what occurred with computer resellers in the 1990s, for instance. It is an age old saga in advertising and PR!
The trick is to persuade investors that they are buying something which is more than a people business – one where the assets leave the premises everyday. Labs have a certain amount of capex and look “sciencey”, so it is easy to persuade investors that this is the case. But if a lab loses its top doctors then sales quickly slump.
In fact, the success of Mentha (who was a major shareholder in Medisupport just sold for SF277m (including debt) to Sonic), Oger (who sold Biomnis to Duke Street at the height of the market and has just sold Bio-Access to Eurofins for €225m (including debt)) and Souetre, who sold a large stake in Labco to 3i and is now selling his personal shares in Labco to Cinven, all go to show that these are people businesses, first and foremost.
Privately owned lab groups often claim that when a company goes into private equity ownership its performance slumps. “Private equity puts in expensive management which it changes every 2-3 years. It follows a short-term approach which leads it to lose customers. And it adds an extra layer of expensive people,” was how one private owner put it to us.
Thee are exceptions. Take Sonic, the big, listed Aussie lab group. But then again it is run by a long-term entrepreneur in Colin Goldschmidt, and has proved adept over the years in persuading lab doctors to sell to it, rather than going through public auctions. And Labco, whilst 3i was invested, grew from €30m sales/€60m EBITDA in 2007 to €650m sales/€130m EBITDA in 2014, with constant 4.5x net debt to EBITDA ratio. Not a bad result.
Similar dynamics should apply in asset-light sectors such as dentistry, fertility or cosmetic surgery. And they will apply far more in Emerging Markets, where many enticing lab chains, that will soon be offered to investors, are forming. Caveat emptor.
We would welcome your thoughts on this story. Email your views to Ariane Jugieux or call 0207 183 3779.
