Medical services company Healius (HLS) has received an all-scrip buyout bid from its smaller ASX rival, Australian Clinical Labs (ACL). But Morningstar analyst Shane Ponraj says the proposed deal, which would create Australia’s largest pathology provider, will likely face several hurdles. 

By market capitalisation, ACL is less than half the size of Healius, meaning if the deal were to proceed, Healius shareholders would secure the majority 68% stake in the combined group and the remaining 32% would go to ACL shareholders.

But Ponraj says the offer "materially undervalues Healius as a stand-alone business".

The bid - which values Helius shares at $2.66 a piece - offered a nil-premium for existing shareholders, and is a 25% discount to Morningstar’s $3.55 fair value estimate for Healius shares.

“Although Healius has thus far managed the transition away from pandemic testing more poorly than competitors, it remains well-placed to benefit from operating leverage as activity levels recover in its base businesses, with margins also supported by its cost initiatives,” Ponraj says.

The offer is also markedly down on the company’s historical share price and arrives after a difficult post-COVID transition for Healius. Shares in the company have been steadily trending down from a 52-week high of $4.57 in April 2022. 

In an investor presentation outlining the offer, ACL estimated the merger could generate cost synergies of $95 million.

However, Ponraj says ACL will likely face headwinds in getting the deal over the line.

The proposal is subject to several conditions including ACL shareholder approval, Healius shareholder approval of at least 90%, Healius’ fiscal 2023 financial performance, and regulatory approvals including those of the Australian Competition and Consumer Commission and the Foreign Investment Review Board.

“Healius’ board is yet to evaluate the offer, but we expect it will likely reject or negotiate the proposal in the absence of higher interloping bids,” he says.

If the deal does make it through the Healius board, there may be larger regulatory hurdles to surmount, given the competition concerns surrounding the merger of two major health services providers.

“Particularly uncertain is the ACCC’s view of the transaction given an ACL-Healius merger would create Australia’s largest pathology provider and command over 40% market share and well over 50% of collection centres in Victoria, Western Australia, and the Northern Territory,” Ponraj says.  

“As such, we think there is risk of ACCC resistance to the deal.”

Still, Healius shareholders appeared to like the idea of a deal - even if it may not get up at this price. Healius shares closed 8.3% higher on Monday.