Laboratory Corp of America Holdings (LH.N) said it would pay $6.1 billion for Covance Inc CVD.N, which carries out trials for drugmakers, as its diagnostic services business faces pressure from reimbursement cuts.
Covance's shares jumped 25 percent to $100.28, nearing LabCorp's offer price of $105 per share. LabCorp shares fell 8 percent to $100.38 as one analyst questioned how quickly cost savings could be achieved.
Oppenheimer's Bret Jones said cost savings that support the rationale for the deal seem to be longer term and lack a clear path.
The cash-and-stock deal allows LabCorp to expand into the fast-growing contract clinical trial market, add to its existing central labs business and benefit from Covance's presence outside the United States.
LabCorp and larger rival Quest Diagnostics Inc (DGX.N) have been grappling with cuts in reimbursement rates for certain diagnostic tests and fewer tests being ordered.
"For LabCorp, the last few years have been challenging with regards to volume and price perspective," Evercore ISI analyst Michael Cherny said.
"And so to diversify away to a more pharma-related customer base will help mitigate some of those risks in the long term."
Covance's drug development outsourcing services help pharmaceutical companies cut costs by eliminating the need to maintain in-house laboratories.
Covance shareholders will receive $75.76 in cash and 0.2686 LabCorp shares for each share held. The offer represents a premium of 32 percent to Covance's closing price on Friday. [ID:nBw30RdTXa]
LabCorp is offering nearly double Covance's intrinsic value, according to Thomson Reuters StarMine. The value is calculated using analysts' five-year earnings estimates and modeling the growth trajectory over a longer period of time.
LabCorp said it intends to finance the deal with cash in hand and debt financing from BofA Merrill Lynch and Wells Fargo Bank.
LabCorp will be able to utilize its armory of long-term patient data as a tool to recruit and fill trials rapidly - a major challenge faced by contract research organizations - LabCorp CEO David King said in a conference call on Monday.
The enterprise value of the deal is about $5.6 billion, including Covance's long-term debt of $250 million and excluding cash and cash equivalents of $705 million at the end of September.
Excluding one-time costs, LabCorp said it expected the deal to add to adjusted earnings per share in 2015 before synergies, and save over $100 million within three years of closing.
David King will serve as CEO of the combined company after closing of the deal, expected in the first quarter of 2015.
Lazard, BofA Merrill Lynch and Wells Fargo Securities LLC are financial advisers to LabCorp, while Sullivan & Cromwell LLP and Hogan Lovells are legal advisers.
Goldman Sachs & Co is the financial adviser to Covance, while Cravath, Swaine & Moore LLP is legal counsel. Covington & Burling LLP is serving as its antitrust counsel.
(Reporting by Natalie Grover and Ankur Banerjee in Bangalore; Editing by Sriraj Kalluvila and Saumyadeb Chakrabarty)