Cinven’s indicative EUR 10 per share Synlab bid seen as below fair value

Anything below EUR 13 per share would be considered a lowball offer, one of the shareholders said. A fair price would be at least EUR 11 per share, the other shareholder added.

Cinven listed Synlab in April 2021 at EUR 18 per share and still owns 43% of the business. Buying the business back at EUR 10 per share would be unacceptable, the second shareholder said.

"We are definitely not selling at that price," the shareholder added.
The first shareholder did not speculate on whether he would tender his shares at EUR 10 as he would have to see a firm offer first. The second shareholder was uncertain if he would tender his shares should Cinven offer a price above his fair value.

"It all depends on what the market looks like at the time, what else I can buy," this shareholder said. He would likely wait for a squeeze-out, he added.

Shareholders that bought in at a lower share price than EUR 10 might be more inclined to sell, this shareholder noted. Synlab’s stock price first fell below EUR 10 when it issued a profit warning early in February and the shares hit a low of EUR 6.75 on 2 March this year.

Revenue declined to EUR 3.3bn during 2022 compared to EUR 3.8bn in 2021 as a boom in pandemic-related medical testing started to taper off, according to full-year results published on 16 March. COVID-19 testing activities accounted for 42% of 2021 revenues and declined to 24% of revenues in 2022. Revenue and EBITDA margins are also expected to decline in 2023, according to management guidance.

Synlab has not managed the post-COVID downturn very well and underestimated inflation risks, the first shareholder said. It is also affected negatively by pricing regulation on lab tests in France, he said. The country accounts for around 21% of group revenue. L’Assurance Maladie, France’s public healthcare insurance provider, has been trying to enforce EUR 250m worth of savings on the laboratory sector via tariff cuts, with further price negotiations expected for the years 2024 to 2026.

One of Synlab’s issues is stock price illiquidity caused by Cinven’s large stake which makes its share price volatile, the first shareholder said. A placement in November 2021 at EUR 22.15 per share increased Synlab’s free float to 26%, but that is still not satisfactory, this shareholder said. Shareholders aside from Cinven include Novo Holdings (17%), Ontario Teachers' Pension Plan (8%), management (8%), and the State of Qatar (5%), according to Synlab’s website.

Cinven first acquired Synlab in June 2015 for EUR 1.8bn via its Fifth Cinven Fund, a 2012-vintage vehicle, and merged it with Labco – fuelling early growth with a string of bolt-on acquisitions.

Rival bidders, ultimate exit issues
A rival bidder for Synlab seems unlikely given its concentrated ownership structure, the second shareholder said. However, a Synlab take-private has been pitched to other PE funds recently, a source familiar with the situation said. These other funds all agreed that Synlab is undervalued in principle but hesitated to take any action given tariff issues in France, healthcare reform in Germany, and question marks regarding how a future exit would be executed, the source said. Synlab was prepared to receive takeover offers given its low share price but it was a surprise that the interest came from Cinven, a second source familiar with the company said.

There are companies in the clinical lab testing space that could be interested in Synlab but this might be unlikely given the sector has already undergone a lot of consolidation, a sector advisor said. Achieving a PE exit for this type of business is a challenge, the sector advisor said. "So long as the PEs are just doing pass-the-parcel the whole thing works, but what is the final exit option? Sell to a strategic? Some of these TICC players have simply become too large", the advisor said, pointing to both Synlab and testing, inspection, certification and compliance (TICC) sector peer Applus.

Carlyle listed Applus in 2014 at EUR 14.50 per share and anyone who bought the stock at IPO price has never seen the returns, the advisor said, drawing parallels with Synlab. Shares in Applus closed yesterday at EUR 7.18, 50% below its IPO price.

This could be because these buy-and-build cases require a lot of capital, which may work for PEs which put high leverage on assets, but not so much for listed companies, the advisor continued.

"Some PEs have essentially cornered themselves in that these assets might just perpetually end up in PE hands," he said.

There is a big overhanging question of how Cinven will exit if it does take Synlab private, the first source noted.

"If Cinven buys back Synlab, it’s not going to IPO again," the first shareholder said. "The market will not buy it – a company that was quoted at EUR 18 and sold at EUR 10. This memory will stay."

Shares in Synlab closed on 23 March at EUR 9.70 for a EUR 2.1bn market cap, a 3% spread to Cinven’s indicative offer.

Cinven declined to comment, while Synlab did not respond to a request for comment.

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• Topics
• Buyouts
• DACH
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• Cinven
• Take Private