NEW YORK (Reuters) - An activist investor in Alere Inc ALR.N wants the health diagnostics and services company to explore a sale of its drug testing business, which it believes could fetch as much as $2.5 billion and help Alere pay down debt, two people familiar with the matter said on Tuesday.
Alere, which has a $2.1 billion market value but has nearly $3.8 billion in long-term debt, has come under pressure from investment firm Coppersmith Capital Management, which disclosed a 5.8 percent stake earlier in May and urged the company to restructure its portfolio to boost shareholder value.
Coppersmith, founded by former partners of now-liquidated activist fund MMI Investments, has already said publicly that Alere should sell or close its struggling health management business, which it had built up through acquisitions worth $1.8 billion - with $1.4 billion of that amount already written off.
In addition, the investor told Alere privately that the company should also consider selling its toxicology business for drug abuse testing, a deal that could generate $2 billion to $2.5 billion in proceeds, the sources said. They asked not to be identified because the matter is not public.
Representatives for Coppersmith declined to comment, while Alere did not respond to requests for comment.
Alere’s toxicology business offers drug testing products and services to hospitals, clinics, law enforcement agencies and rehabilitation centers and helps them detect drug or alcohol abuse. Larger rivals Quest Diagnostics Inc (DGX.N) and Laboratory Corporation of America Holdings (LH.N) also make drug-testing products and services.
Alere itself toyed with the idea of selling the unit in the past. Chief Executive Ron Zwanziger said at the JPMorgan healthcare conference in January 2011 that the company had a “fair amount of debt” on the balance sheet and could opt to sell the toxicology business if needed to pay down debt.
While Alere does not break down results for its toxicology unit, the business is estimated to have $600 million in annual sales and $200 million in earnings before interest, tax, depreciation and amortization (EBITDA), the people said.
Based on multiples for previous deals in the industry, the Alere unit could fetch 12 times EBITDA in a sale, they added, saying the proceeds would allow Alere to pay off its senior debt.
Selling the profitable toxicology unit would trigger a sizeable tax. But Alere could offset any tax hit by also selling or closing its health management business, whose value has been written down significantly over the years and as a result, the sale of which would generate a tax benefit, the people said.
Waltham, Massachusetts-based Alere, which makes a range of diagnosis tools such as home pregnancy tests and fertility monitoring kits, expanded its disease management with the $900 million acquisition of Matria Healthcare in 2008.
The New York-based hedge fund, however, has argued that diagnostics and health management are different businesses, and is asking the company to reverse its acquisition strategy of the past several years. Coppersmith also nominated three candidates to Alere’s board.
Additional reporting by Jessica Toonkel; Editing by Gerald E. McCormick and Andrea Ricci