Filed by: Quest Diagnostics Incorporated
This communication is filed pursuant to Rules 165 and 425
promulgated under the Securities Act of 1933, as amended.
Subject Company: Unilab Corporation
Commission File No.: 0-22758
FORWARD-LOOKING STATEMENTS:
This communication contains certain forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements,
which may include, but are not limited to, statements concerning the financial
condition, results of operations and businesses of Quest Diagnostics and Unilab
and the benefits expected to result from the contemplated transaction, are based
on management's current expectations and estimates and involve risks and
uncertainties that could cause actual results or outcomes to differ materially
from those contemplated by the forward-looking statements.
Factors that could cause or contribute to such differences may include, but are
not limited to, the risk that the conditions relating to the required minimum
tender of Unilab shares or regulatory clearance might not be satisfied in a
timely manner or at all, risks relating to the integration of the technologies
and businesses of Quest Diagnostics and Unilab, unanticipated expenditures,
changing relationships with customers, suppliers and strategic partners,
conditions of the economy and other factors described in the most recent reports
on Form 10-Q, most recent reports on Form 10-K and other periodic reports filed
by Quest Diagnostics and Unilab with the Securities and Exchange Commission.
ADDITIONAL INFORMATION:
Quest Diagnostics intends to file a Registration Statement on Form S-4 and a
Schedule TO, and Unilab plans to file a Solicitation/Recommendation Statement on
Schedule 14D-9, with the Securities and Exchange Commission in connection with
the transaction. Quest Diagnostics and Unilab expect to mail a Prospectus, which
is part of the Registration Statement on Form S-4, the
Solicitation/Recommendation Statement on Schedule 14D-9 and related exchange
offer materials, including a letter of election and transmittal, to stockholders
of Unilab upon commencement of the exchange offer.
In addition, Quest Diagnostics intends to file a Statement on Schedule 13D
relating to its agreement with Kelso Investment Associates VI, L.P. and KEP VI,
LLC. Investors and stockholders of Unilab are urged to read all of these
documents carefully when they are available. These documents contain important
information about the transaction and should be read before any decision is made
with respect to the exchange offer. Investors and stockholders will be able to
obtain free copies of these documents through the website maintained by the
Securities and Exchange Commission at www.sec.gov. Free copies of these
documents may also
be obtained from Quest Diagnostics, by directing a request to
Quest Diagnostics Incorporated at 1 Malcolm Avenue, Teterboro, NJ 07608, or from
Unilab, by directing a request to Unilab Corporation at 18448 Oxnard Street,
Tarzana, CA 91356.
In addition to the Registration Statement on Form S-4, Schedule TO, Prospectus,
Solicitation/Recommendation Statement on Schedule 14D-9 and related exchange
offer materials, both Quest Diagnostics and Unilab file annual, quarterly and
special reports, proxy Statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, Statements or other
information filed by Quest Diagnostics or Unilab at the SEC public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549 or at any of the
Securities and Exchange Commission's other public reference rooms in New York,
New York and Chicago, Illinois. Please call the Securities and Exchange
Commission at 800-SEC-0330 for further information on the public reference
rooms. Quest Diagnostics' and Unilab's filings with the Securities and Exchange
Commission are also available to the public from commercial document-retrieval
services and at the website maintained by the Securities and Exchange Commission
at www.sec.gov.
The following is a transcript of a conference call with investors:
QUEST DIAGNOSTICS INCORPORATED
April 2, 2002
8:00 a.m. CST
Coordinator Welcome to the Quest Diagnostics Investor conference
call. At the request of the company, this call is being
recorded. During our Q&A session, callers are limited
to one question per turn. The entire contents of this
call, including the presentation and question and
answer session that will follow, are the copyrighted
property of Quest Diagnostics with all rights reserved.
Any redistribution, retransmission or rebroadcast of
this call in any form without the express written
consent of Quest Diagnostics is strictly prohibited.
Now I would like to introduce Cathy Doherty, Vice
President of Communications and Public Affairs for
Quest Diagnostics. Go ahead, please.
C. Doherty Thank you for joining us. I am here with Ken Freeman,
Chairman and Chief Executive Officer of Quest
Diagnostics. We are also joined by Bob Hagemann, our
Chief Financial Officer; Bob Whalen, Unilab's CEO,
joins us by telephone from California. Ken Freeman will
make a few brief remarks on our news so that we can get
right to your questions.
We are currently in a quiet period and will not be
commenting today on financial results for the first
quarter until we release earnings on April 18th. At
that time, we will also provide updated guidance. Some
of our commentary and answers to questions may contain
forward-looking statements that are based on current
expectations. Actual results could be materially
different from our expectations due to factors that are
detailed in our year 2001 10-K and subsequent filings,
as well as from unanticipated events. Now here is Ken
Freeman.
K. Freeman Thank you, Cathy. Early this morning we took another
exciting step to accelerate profitable growth by
announcing a definitive agreement to acquire Unilab
Corporation in a transaction valued at $1.1 billion,
including about $200 million in Unilab debt. This
acquisition will establish Quest Diagnostics as the
leading provider of diagnostic testing in California,
the nation's largest market. Customers will see
expanded access to laboratory testing services and
greater convenience with one-stop shopping for all of
their diagnostic testing needs. Further strengthening
our distribution network will make us an even more
attractive partner with diagnostic discovery companies.
And we will add seasoned management talent to our team.
The terms are summarized in this morning's press
release and we will be filing the merger agreement
today as part of a Form 8-K. So I'd like to spend the
next few minutes
sharing my enthusiasm about this transaction and how we
expect it to benefit our employees, our customers and
our shareholders.
The benefits to our customers are compelling. Combining
our two companies will significantly enhance customer
service in California. Customers will access diagnostic
testing services through a combined network of about 50
rapid-response laboratories and 500 conveniently
located patient service centers, by far, the largest in
the state. This combination will give Unilab customers
access to innovative technologies and an expanded
esoteric testing menu from our Nichols Institute based
in San Juan Capistrano.
Customers will also have available direct
physician-to-physician consultations with the
industry's most extensive network of medical and
scientific specialists. Additionally, physician and
hospital customers will benefit from our
state-of-the-art electronic connectivity services.
The transaction creates value for Quest Diagnostics
shareholders as well. Unilab meets our three ground
rules for acquisitions: full compliance with the law,
well managed and accretive to earnings per share during
the first year.
Unilab has a strong regulatory compliance program that
is very similar to our own. In addition, Unilab is well
managed, with profitability levels among the highest in
the industry. Assuming a late second quarter close, the
transaction will be modestly accretive to earnings
during 2002; approximately $0.02 to $0.03 per share
before an anticipated pre-tax charge related to the
transaction of up to $20 million, most of which will be
cash costs. We anticipate significant synergies,
approximately $30 million on an annualized basis,
following the completion of the integration within two
years after the closing. We see the biggest
opportunities for synergies in eliminating duplicate
infrastructure, internalizing esoteric testing and
reducing bad debt.
This morning, Standard & Poor's reaffirmed our rating
of BBB- with a positive outlook and we expect Moody's
will also, at a minimum, reaffirm our rating and
outlook. Now I'd like to introduce Bob Whalen, who will
share his perspective on our news.
B. Whalen Thank you, Ken. Joining together with Quest Diagnostics
is great for Unilab shareholders. Unilab investors will
now have the opportunity to become shareholders in the
premier laboratory company in our industry, a company
with tremendous growth opportunities and a strong track
record for creating shareholder value. In addition,
Unilab shareholders will have
the opportunity to share in the value created by
combining our two companies.
Our customers in California will benefit considerably
from expanded access to lab services throughout the
state. More importantly in my view, they will now have
direct access to Nichols Institute, Quest Diagnostics'
world-renowned esoteric testing laboratory and research
and development center. Physicians and hospital
customers will be able to consult with nearly 300 MDs
and PhDs, the most extensive network of medical and
scientific specialists in the industry.
Personally, I am thrilled to be joining a company
focused on quality with strong vision and values; and I
am excited about leading the combined local operation
in California, a market I am very familiar with. I have
led successful integrations before and look forward to
creating benefits for our customers and enhanced value
for our shareholders.
K. Freeman Thank you, Bob. As you know, we've demonstrated our
ability to effectively integrate acquired companies and
so has Unilab. I'm very pleased that Bob will lead the
integration of our California operations and be
responsible for our local California business. Bob is a
seasoned laboratory industry executive with a strong
track record of results during his more than 30-year
career. We will also use the proven integration
approach that has served us so very well through
previous acquisitions.
In this case, while detailed integration planning has
not yet started, our strategy anticipates closing
certain facilities to rationalize capacity in
California. As a result, some positions will be
eliminated over time, which we expect to address
primarily through normal, voluntary attrition as we've
done in past integrations. Also, as in the past, we
will treat all employees with fairness, dignity and
respect, consistent with our values.
Our growth initiatives, focused on Six Sigma quality,
genomics and customer connectivity, coupled with
selective acquisitions, are building on a strong
foundation to deliver sustainable, long-term profitable
growth. Our strategic growth plan uniquely positions
Quest Diagnostics by broadening our geographic
presence, expanding our access and distribution
network, enhancing customer service to meet the special
needs of hospital and esoteric testing customers and
accelerating the development of innovative new tests
and technologies.
Putting it all together, we remain committed to our
financial goals: achieving sustainable, double-digit
revenue growth; EBITDA margins in excess of 20% and
continuing to deliver earnings per share growth of at
least 30%. The acquisitions of AML and Unilab provide a
clear path to
deliver in excess of 30% earnings per share growth this
year and next. They also provide additional fuel as we
drive to deliver outstanding returns for our
shareholders well into the future. We're excited about
the opportunities this transaction creates. Now, let's
open up the call for your questions. Operator?
Coordinator Our first question comes from David Lewis. Sir, you're
online.
D. Lewis Good morning guys, congratulations. A couple quick
questions. Could you give a little more granularity,
Ken, perhaps, on your plans on internalizing any
esoteric tests that Unilab outsources; secondarily,
maybe any large managed care contracts in the State of
California that you think are particularly meaningful;
and lastly, any concerns given the now very large share
the number one and number two players in California
will now have in terms of anti-trust or HSR clearance?
K. Freeman You've given me three in one here, David. I'll do my
best to get at them. The first one, as it relates to
esoteric testing and in bringing the esoteric testing
in house that's currently sent out by Unilab, we will
move with deliberate speed over time to bring the
esoteric testing send outs in house to Nichols
Institute. This certainly represents one of the synergy
opportunities from the transaction.
In terms of managed care relationships, as you know, we
don't comment on specific relationships with specific
customers. As we've demonstrated in the past, certainly
as we move forward, we would expect to use appropriate
discipline ensuring that we're appropriately
compensated for the services we provide. Unilab does
have a much broader payer mix than exists in many other
markets around the US and, again, we don't typically
disclose specific customer information. Their largest
customer accounts for less than 5% of revenues.
In terms of the market itself in California,
approximately $3.8 billion of lab testing is performed
in California today. The market seems to be growing at
rates higher than the general US marketplace, which, as
you'll recall, is growing at 5% to 7% per year; Unilab
has about 10% of the market today. On a combined basis,
our market share will be approximately 12% of the
market in California, which is consistent with our
overall market share across the United States.
California is a very competitive marketplace today; it
will remain very competitive after this acquisition is
completed. There are other very large providers in the
state from a hospital and insurance standpoint, as well
as about 600 smaller independent clinical laboratories
competing in California.
Coordinator Thank you. Again, all callers are limited to one
question per turn please. We now have our next
question from Kathleen Lamb from Credit Suisse First
Boston.
K. Lamb Good morning and congratulations. I have one quick
question. In the refinancing comment in the press
release, does that contemplate tendering for the Unilab
debt?
R. Hagemann Certainly that's something that we're going to
consider. We'll be evaluating the economics attached
to that.
K. Lamb Are there any provisions in the indentures of those
bonds that would require it; or is it just a matter of
looking at the interest rate on those bonds?--
R. Hagemann We'll be looking at the interest rates.
Those bondholders have the right to put the debt to us
upon the completion, but it's at a very modest premium
of 101%.
K. Lamb Correct. Thank you.
Coordinator We now have a question from David Zimbalist from Morgan
Stanley.
D. Zimbalist Hello. I was wondering if you could comment a little
bit about the Arizona operations of Unilab and to what
extent that would have to be integrated with Sonora
Quest.
K. Freeman I'll take that one, thank you. In the State of Arizona,
if you're familiar with what we did when we acquired
SBCL, we are required through our joint venture to
offer business operations that might exist in Arizona
to our partner, to our joint venture called Synora
Quest Laboratories. We will be doing that in accordance
with the terms of our relationship in Arizona. It's
important to keep in mind that the Arizona operations
of Unilab today are very small, very small indeed.
D. Zimbalist Can you give us some quantification of that?
K. Freeman Bob Whalen, would you please help us out on that?
B. Whalen At the moment, it's about $3 million a year.
Coordinator I'm sorry, are you ready for the next question?
K. Freeman Yes.
Coordinator Thank you. We now have a question from Robert
Willoughby from Credit Suisse First Boston.
R. Willoughby Thank you. Ken, can you remind us what you folks are
tying senior management's incentive compensation to and
based on the consolidation challenges you have in
front, is there any thought of changing any of these
metrics that you might be compensating senior
management on?
K. Freeman Yes, Rob. What we do in terms of compensation in
general for our senior management across Quest
Diagnostics is drive a very significant process that
relates to earnings per share growth in addition to a
balanced score card. But the vast majority of the
compensation is driven by delivering earnings per share
growth. In terms of Bob's contract itself, Bob has
agreed to stay on with us; we're very thrilled about
that, through an employment agreement that we've
executed along with many of the members of his senior
management team. Their compensation is tied very, very
specifically, to achieving the financial goals that
we've set in place together in the State of California.
Coordinator We now have a question from Drew Figdor from Tiedemann.
D. Figdor Just two questions. In terms of timing, it's an
exchange offer; or when do you plan on launching it and
what do you need to close it because you say late
second quarter. Is there any particular reason why it
should take more than 45 days? Is that because you
might anticipate a second request from the government
on the anti-trust? The Kelso, did they say if they're
going to elect stock or cash?
K. Freeman You asked us a bunch of questions. Let me take a crack
at some of them. I may need some help from my partners
here. We would expect to launch the cash election
exchange offer during the month of May. We'll be filing
our Hart Scott Rodino during the month of April. You
know it's a two-step process to include, after the cash
election exchange offer, the stock for stock merger.
And as time goes on, we would expect that all of those
activities will be complete by the end of the second
quarter. As we look at the transaction itself, you can
expect that we will be very much coordinating dialogues
with the folks at the FTC. We do not anticipate any
specific issues whatsoever; however, we will be working
in concert with them after the HSR filings have been
submitted.
D. Figdor And then Kelso, when you say that they're tendering
into it, did they say to you if they want stock or
cash?
K. Freeman Kelso, at this point in time, has not made a specific
commitment. They will be, through public filings, doing
an indication at the right moment.
R. Hagemann And they had the same rights as everyone else in the
exchange offer in their ability to elect stock or cash.
D. Figdor Okay, thank you very much.
Coordinator We now have a question from Bill Bonello, US BancCorp
Piper Jaffrey.
B. Bonello Could you just comment real briefly on how this
impacts, particularly in '03, your 30% EPS growth
targets? Is this above and beyond that or was this type
of acquisition contemplated in your suggestion that you
could grow 30%?
K. Freeman Bill, I'm going to have to give you qualification, as I
begin this reminding you and everyone that we're right
now in a quiet period, so we're not in a position to
formally adjust guidance on this call. As you know,
however, we do see accretion in the year 2003 of $0.18
to $0.20 per share, the combined accretion from AML and
Unilab. We are very comfortable with the prior guidance
we've given you that says that our earnings per share
would be at least 30% higher than the prior year. We're
fully committed to deliver on that commitment for '02
and '03 and certainly, the acquisitions of both Unilab
and AML will provide additional fuel to achieve those
earnings objectives.
B. Binello Thank you.
Coordinator Our next question comes from Sandy Draper from Sun
Trust Robinson Humphrey.
S. Draper This may be mostly a question for Bob and maybe a
little bit of a tough one. It doesn't seem like there
was that much of a premium paid. Obviously, from the
IPO, the stock is up and there's a good return there.
But for current shareholders looking at it, what was
the motivation for selling when there wasn't that
significant a premium to the current valuation in the
stock market?
K. Freeman Bob Whalen, do you want to take that please?
B. Whalen Sure. I think from the Unilab Board's perspective the
critical question was not calculating a one week or a
one day premium, but rather what provides the highest
value for our shareholders. Suffice it to say, you can
be very comfortable that the Board looked at all
available alternatives and that would be other
purchasers, going it alone; we looked at the future of
the business, both within California, our ability to
grow within the state, our ability to expand into
such states as Arizona; and we looked at other
potential opportunities outside the state. At the end
of the day, we felt that this benefited our
shareholders the best from all the various alternatives
that were out there.
It allows those shareholders in Unilab today, if they
choose to, to cash out their investment, or if they
still like the industry, they can now own stock in the
best, strongest laboratory company in the United
States. We felt at the end of the day that the fixed
ratio structure that allows Unilab shareholders to
benefit from the upside of the transaction as well as
the future growth of Quest Diagnostics stock, which has
also been a great performer, and, as I said, if the
shareholders want to convert to cash, they can and if
not, they have the option of retaining the Quest stock.
S. Draper Great, thank you.
Coordinator Our next question comes from Benner Ulrich from UBS
Warburg. You're online.
R. Goldwasser Hello, this is actually Ricki Goldwasser. Can you
remind us what percent of Unilab revenues are coming
from hospitals and what percent is currently capitated
and what is currently fee for service?
K. Freeman Bob, would you like to take that?
B. Whalen I will say we have very little business from hospitals.
I think this is one of the real opportunities for us is
to be able to now sell the Nichols Institute Quest
Diagnostics Reference Laboratory work directly to our
potential clients. We have a very large base of
business in Northern California, but very few
hospitals. I think this is a real opportunity for us in
the longer term to extend and expand our hospital
revenue. But right now our hospital revenue is less
than probably 2% or 3%. Cathy, do you want to give them
the breakdown on the other fee?-
C. Doherty --Sure. Ricki, in terms of managed care capitated
revenue as a percentage of total revenue from Unilab;
it's about 10% to 15%. As far as third party fee for
service and again, this is revenue, it's about 30% to
35%.
R. Hagemann Keep in mind, in Unilab's 10-K, which was recently
filed, there is payer mix information in there that
breaks out revenues and volumes.
R. Goldwasser Given the environment in California, do you see any
opportunities in further shifting from the 10% to 15%
capitated towards fee for service?
K. Freeman Ricki, as we look at the marketplace in California, we
see the very same trends that have been occurring in
other parts of the country beginning to
take hold in California as well, which indeed is a
beginning of a shift from capitation to fee for service
plans.
B. Whalen I think I just might add, Ken, that I've been talking
about this on our conference calls and in our investor
conferences a lot and I really do echo what Ken says, I
really believe that the trend is underway. If you look
nationwide, the Los Angeles Times published an article
back about a month ago that said for the first time,
HMO enrollment declined to 48% in 2001 from 55% in 2000
and this was a study that Kaiser did. I don't think
there's any question that that trend is continuing.
R. Goldwasser Thank you.
Coordinator Again, all callers are limited to one question per turn
please. We now have a question from Tom Gallucci from
Merrill Lynch.
T. Gallucci As a follow up to that question, clearly, Unilab has
very strong margins. Can you talk about it maybe part
of that is due to the concentration of the business,
but can you maybe just talk about the pricing
environment in California versus the rest of the
country and how that impacts it? Also, how bad debt
expense plays into the equation?
K. Freeman Tom, certainly, the California market is highly
competitive. The industry is highly competitive with
numerous independent labs and hospital based
competitors, so the marketplace in California is, I'd
say, as competitive as any other marketplace in the
United States, no more, no less. As we've done,
certainly, in the past, together on a combined basis,
we would expect to exert appropriate discipline in
pricing, which, certainly, we at Quest Diagnostics have
been doing for many years and our understanding is that
Unilab has also been engaging in a similar process of
engaging in discipline and weeding out poor performing
accounts over the past several years as well based on
our due diligence efforts.
R. Hagemann Tom, Unilab's bad debt is just over 7% or so. As you
know, our's is around 6% and we have a long-term target
of driving that towards 4%. Their DSOs are in the mid
60's range; our DSOs are in the low 50's. We look at
both the bad debt and DSOs as opportunities. We believe
that the bad debt is a synergy opportunity and driving
down the DSOs is a cash flow opportunity for us.
T. Gallucci Thank you.
Coordinator We now have a question from Mark Ort from Glazer
Capital.
M. Ort Hello. You mentioned earlier that you have 12% of the
combined market share in California. Is that including
hospitals and if not, what would be your market share
combined of the independent facilities?
K. Freeman This includes the relevant market, which is all
providers of laboratory testing. It's really the only
way to look at this industry because we are both
providers and competitors of hospitals in marketplaces
across the United States, so the $3.8 billion market
that we're talking about is hospitals as well as
physician owned or physician office laboratories as
well as the more than 600 independent clinical
laboratories in the state.
M. Ort Can you break out the numbers for the independents
though? Do you have that number?
C. Doherty About 55% of that market is hospital driven with about
30% coming from independent clinical labs, the rest
coming from physician office labs.
M. Ort So it's probably about 25% of the market share from
looking at only the independents.
K. Freeman You're in the ballpark.
M. Ort How does that stack up against your primary competitor,
LabCorp.?
K. Freeman We don't tend to do a lot of dialogue about specific
market shares of various companies in various
marketplaces. What I would say, however, again, is that
in the State of California, it's an intensely
competitive marketplace like every other marketplace in
this country. The relevant market to consider is who
we're going up against every single day and competing
for business, which is hospitals, physician office labs
and physician owned labs, as well as other independent
clinical laboratories.
M. Ort Okay, thank you.
Coordinator Our next question comes from Andrea Bosse from Salomon
Smith Barney. Ma'am, you're online. I'm sorry, we'll go
to the next question and that is from Jeremy Carton
from HBV Capital.
J. Carton Hello. If we elect 100% stock as consideration, will it
be subject to proration?
K. Freeman If the overall transaction goes beyond 30% election of
cash, there will then be proration to a maximum of
30% cash consideration in terms of the entire
transaction.
J. Carton Thank you.
Coordinator We now have a question from John Hess from Bank One
Investments.
C. Haff It's Charles Haff, Bank One. In the spirit of full
disclosure, assuming that Unilab's advisors talked to
Quest Diagnostics before the IPO ten months ago, I was
wondering if you could characterize discussions that
you had at that time about possibly acquiring Unilab
and then maybe from Unilab's perspective now, why is
the time now for doing this deal versus ten months ago?
K. Freeman Any dialogue in terms of historical discussions between
the two companies will be documented fully in
subsequent filings and you'll be able to find that
information there.
C. Haff Could we get the spirit of Unilab's Board's thoughts
on?
B. Whalen Sure. I think it goes back to what I said earlier as it
related to premium. We sat down and we looked at all of
the alternatives available to us, which was to go it
alone and what would that mean, what are our growth
opportunities in the state, what are our growth
opportunities outside the state. For example, we had a
very high level of interest in AML. Tim Brodnick and I
are good friends. We had talked back and forth along
the line; our board members had conversations with AML.
So when a property like that goes off the market that
limits one of our options. We just felt at the end of
the day and we feel very, very strongly about this that
this was a good deal at this point in time for our
shareholders.
C. Haff Thank you.
Coordinator We now have a question from Kemp Dolliver from SG Cowen
Securities.
K. Dolliver Thank you. Given that you're announcing this
acquisition within roughly a day of closing the AML
purchase, are we to expect that in the third quarter
you will announce something else? Essentially, what's
your appetite for additional acquisitions this year?
Thank you.
K. Freeman Thanks for that question, Kemp. I guess what I'd say to
you here is crystal clear. As you know, we as a company
are very deliberate in how we run our business. We go
with deliberate speed, but we're also very
opportunistic. As we look at these two transactions,
one that closed yesterday and the one we're announcing
today, the acquisition of Unilab, certainly, what we're
doing here is driving a conscious effort to continue
the transformation and our leadership as Quest
Diagnostics in our space.
We purposely wanted to put these transactions together.
One way to put it is that we put the West as becoming
part of Quest. We're dramatically improving our
position in two very rapidly growing states in the
Western United States. Nevada is the most rapidly
growing state in the Union on a percentage term basis.
California is the most rapidly growing state in the
United States in terms of shear numbers of people
increased to the population rolls each year.
The SBCL integration is behind us; we're working on our
standardization and six-sigma efforts and they're
moving full speed ahead and we feel, certainly, we can
handle these two acquisitions coincidentally,
simultaneously. But I'd like you to keep in mind also
the limited geographic impact of these transactions.
Let me stress that we're only really integrating
operations in California and Virginia, in terms of lab
capacity. We cover geographic markets throughout the
country, so while these transactions are transforming
the company with esoteric testing growth and furthering
our relationships with hospitals, as well as the
geographic reach on the West Coast, this is not as
pervasive a combination of transactions as SBCL was two
and one-half short years ago.
Getting back to the yes or no - will you do another
major acquisition? As always, we're going to be
deliberate as we proceed. It's always possible that a
unique opportunity could come along that we might
consider, but we would, in all instances, need to be
comfortable with the pace of integrations underway. If
you look at our tradition, Kemp, you know us well;
we're very disciplined in such things. We won't bite
off more than we can chew.
K. Dolliver Great, thank you.
Coordinator We now have a follow up question from Tom Gallucci from
Merrill Lynch.
A. Rice It's actually AJ Rice. Hello, Ken and everyone else.
Just a question about the integration of operations.
Obviously in the SmithKline merger, there was both
routine and esoteric. Here, one of the opportunities
is to shift that esoteric business over time over to
Nichols Institute. Can you just give us the flavor for
the logistic challenges of doing that versus routine
business? Is it materially different? What are some of
the things that you think about when you're trying to
shift esoteric business like that?
K. Freeman Certainly. First an overview, AJ, just to put the
overall perspective on it for you. Fundamentally,
remember with AML, what we are in large part putting in
place is an East Coast esoteric testing capability in
their facility in Chantilly, Virginia. We will be the
only major laboratory provider that
has an East Coast and a West Coast esoteric testing
presence, East Coast and West Coast. At the very same
time, what that will imply is that over time, there
will be some business that's performed at Nichols
Institute that we will relocate to the East Coast, to
Chantilly, Virginia. That will free up capacity at
Nichols Institute to bring in additional testing from
the West into that facility.
Certainly, as is the case with any redirection of
specimens, we will be going one customer at a time,
step by step, inch by inch in deliberately in sourcing
the testing at the Nichols Institute and over time,
also, redirecting specimens that are traditionally
coming from the East Coast to the West Coast for
Nichols back to the East. Again, we have our ground
rules, and our first one is the customer has to be
served without disruptions and we'll do this with
deliberate speed, step by step, inch by inch. The
initial feedback from our customers, in terms of the
AML announcement as it relates to having an East Coast
esoteric testing presence, has been very, very
encouraging.
As we move forward, we think that this value
proposition will be profound. One other way to put it
in perspective for you, AJ, on the broader sense is the
fact that unlike SBCL where we went from 40 to 30 major
laboratories around the United States and impacted
every single geographic market, in this case, in terms
of laboratory consolidations and rationalization, we're
only impacting two markets: the metro DC market as well
as California. In addition, the only place where there
will be lab consolidations is California; that's it,
that state only. Our most profitable markets across the
United States, which tend to be from Boston all the way
through the Rocky Mountains, the northern part of the
United States, will not be impacted by what we're
doing.
We'll be moving about 5% to 10% of the specimens our
total company will process as a result of this
integration over the next two years compared to about
25% of the specimens that were redirected only two
short years ago, during the last two years, through the
SBCL integration. So putting it altogether,
integrations are challenging, but we believe if you
take the combination of the Unilab activities,
including internalization of test send outs as well as
the AML integration, we believe our proven capabilities
that we demonstrated with SBCL will serve us well as we
move forward.
A. Rice Okay, thank you.
Coordinator Our next question comes from Andrew Bhak from Goldman
Sachs. Sir, you're online.
A. Bhak Good morning, congratulations. As we look out over the
next three to five years, in terms of future
acquisition strategy, I guess we're following on two
transactions, each with its own unique features, but
that have built out certain capacity, what you might
call infrastructure capacity on the East Coast, or in
building out presence in California. As you look out
strategically with the existing portfolio of assets
that the company has today? Are there any other obvious
areas of incremental acquisition activity, whether it's
infrastructure platform or geographic market focus, or
is it really kind of a selective and targeted strategy
going forward?
K. Freeman We have been, I would have to say, fairly targeted and
selective in the past as well and you can expect that
to continue as we move forward. We will continue to use
our ground rules, which say that companies have to
comply with the law, be well managed and also be
accretive for shareholders in the first year. The
industry itself does remain highly fragmented, so we do
anticipate over time there will be potential
opportunities for growth in various geographic areas.
In addition, we see opportunities potentially over time
in the areas of genomic and esoteric testing moving
forward. Finally, also, much like our MedPlus
acquisition of last year, we do see potential
opportunities moving forward to further broaden our
industry leading line of connectivity options for our
customers.
A. Bhak So when it comes to these types of transactions, aside
from your very tight acquisition criteria, does it
essentially come down to a make versus buy as you think
about the company strategically? Either the costs and
the resources to build out that capacity internally
versus there's a platform, it meets your very strict
acquisition criteria, you can do it and obviously, with
SBCL you've proven your ability to integrate. Is that
the decision filter that you think about?
K. Freeman I think that's an excellent description of part of how
we drive forward. Absolutely. In addition, of course,
deliberate speed is very important as well as we
analyze opportunities.
A. Bhak Okay, great, thank you very much.
Coordinator We now have a question from Henry Reukauf from Deutsch
Bank.
H. Reukauf Actually, my question was answered. Thank you very
much.
Coordinator Thank you, Sir. Then our next question is from Ron
Speaker from Janus.
R. Speaker Could you just quickly go through your anticipated
leverage changes in your EBITDA, interest coverage and
debt levels?
R. Hagemann If you were to look at our leverage on a pro forma
basis for year-end 2001, you would see that our debt to
capital would be in about the 48% range, which is up
about 10 points or so from where we were. You should
expect, though, that as the year progresses, that's
going to improve because we'll be paying down debt with
the cash flow generated from the transactions. But most
importantly, what you need to keep in mind is that both
rating agencies have reaffirmed their credit rating, at
least, S&P has come out. We anticipate that Moody's
will do the same thing, come out and reaffirm for us
both the credit rating and the outlook.
R. Speaker So how much additional leverage did this put on
the...enterprise?--
R. Hagemann --... we anticipate between both the AML transaction
and the Unilab transaction, there will be almost $1
billion in additional debt that will be added. Again,
we'll be paying that down rather rapidly with the
strong cash from operations that we generate.
R. Speaker And is that why you did the one-year term loan instead
of a longer agreement?
R. Hagemann At this point, we have a bridge loan in place to close
the Unilab transaction into and then we'll be
evaluating more permanent financing and you should
expect that it'll be a combination, most likely, of
bank and public debt. The financing for the AML
transaction is being completed out of existing
facilities that we have: an AR revolver and a revolving
credit facility with our banks.
R. Speaker Thank you.
Coordinator Our next question comes from Fred Weiss from Atlantic
Trust Pell Rudman.
F. Weiss Congratulations. My questions have been answered. Thank
you.
Coordinator Thank you, sir. Then our next one is from Nick Ciocci
from MRT Capital.
N. Ciocci Good morning. Could you just go over the merger
consideration again? What happens if all shareholders
elect stock? Will they be forced to be prorated to
guarantee 30% being paid in cash?
R. Hagemann No, the 30% is a maximum. If all shareholders were to
elect stock, we would issue stock to all of them.
N. Ciocci Okay, thank you.
Coordinator We now have a question from Angela Samfilippo from US
Bank Corp/Piper Jaffrey.
A. Samfilippo Good morning. Could you tell me what's assumed in the
$30 million of synergies?
K. Freeman In terms of the synergies from Unilab, we have
indicated $30 million of synergies by the end of the
year 2004. The key areas of synergy include lab
capacity rationalization, the internalization of
esoteric testing send outs into Quest Diagnostics,
specifically to Nichols Institute, reduction of bad
debt, as well as various infrastructure savings as well
including purchasing savings, elimination of duplicate
infrastructure in terms of staffing, logistics and what
have you. We're not in a position today to share
specifics by category. I would highlight for you that
in the year 2002, 2003 and 2004, I'll give you some
numbers. By the end of the year 2004, the combination
of AML and Unilab will realize $45 million of synergies
for Quest Diagnostics' shareholders. In the year 2002,
we expect $5 to $8 million of synergies on a combined
basis from both companies, AML and Unilab. In the year
2003, from the combined companies of AML and Unilab, we
expect to realize $30 million to $35 million of
synergies and essentially complete the integration of
AML. In the year 2004 then, we'll get to the full $45
million commitment.
A. Samfillipo Thank you.
Coordinator We now have a question from Nick Graziano from March
Partners.
N. Graziano Thank you. I just wanted to clarify two items in the
press release. First, if we do elect a combination of
cash and stock, if there is any fixed election there;
if there's any fixed combination of the two? Secondly,
it says that under the agreement with Kelso that they
will sell their shares to Quest if the merger agreement
is terminated. If you could just share any of the terms
around that. Thank you.
R. Hagemann With respect to the first question around cash and
stock, again, each holder of a Unilab share has the
right to receive as compensation for their Unilab
share, either 100% in Quest Diagnostic stock or 100%
in cash, and then the total aggregate cash
consideration would be cut back to 30% if, in total,
the shareholders had elected to receive in excess of
30%.
N. Graziano Can you elect to receive a combination of the two,
50/50 for instance?
R. Hagemann Yes, you can.
Coordinator Our next question comes from Christian Correa from
Lehman Brothers.
C. Correa Hello. I was wondering if you could tell us a little
bit about the American Lab acquisition and how the
anti-trust review went in that situation.
K. Freeman Certainly. We closed the transaction with AML
yesterday, as you know, and the anti-trust review was
very typical under the circumstances. So we went
through the process, had excellent dialogue with the
Justice Department as they went through the appropriate
analysis and we're now moving forward, as you know.
C. Career Thank you.
Coordinator Our next question comes from David Zimbalist from
Morgan Stanley.
D. Zimbalist Hello. Just a follow-up. First of all, could you give
us a percentage of revenues for Unilab from test send
outs and also talk a little bit about the structure,
the way you're managing regionally? It sounds like
California will be run by Unilab's current management
and Nevada would be run by AML, a little bit more about
how you see post integration structure at Quest.
K. Freeman I'll take the second part of the question as it relates
to the management approach as it relates to how we
intend to run the two companies joining the fold.
Certainly, in the State of California, as we put our
existing business together with that of Unilab and we
evaluate the capabilities and the prospects in that
state, we think we have an ideal opportunity to take
the best of management from both companies, which is
our tradition and what we would fully intend to do
under all circumstances. The nuance in California is
the fact that we've asked Bob Whalen -- and he's agreed
and we're thrilled about it -- to lead the overall
local operations of California in conjunction with our
senior leaders and other senior leaders from Unilab. As
we drive the integration planning process, we'll be
putting in place and finalizing the appropriate
management structure. Just as you saw with SBCL, you're
going to see the best of both companies come together
to lead the combined enterprise.
Bob Whalen brings tremendous strength and tradition
into the responsibility; we're thrilled that Bob's
going to be leading the charge with us and our team's
thrilled too overall in terms of the management team in
California to be part of the overall process of driving
the business forward. Again, very consistent with what
we've done in the past, what we did with the SBCL
acquisition where we joined the two companies
together and had representatives of management meld
together in senior leadership positions across the
United States in various geographies.
As it relates to AML, in the case of AML, what we're
doing is we're bringing the hospital business and the
esoteric testing business together in one joint
organization. The leadership of AML is intact as we
drive forward. We do expect over time to continue to
evolve the management structure, but once again, it's
the best of both companies as we drive what's right for
our customers and what's right for our employees and,
of course, what's right for our shareholders.
R. Hagemann David, with respect to your second question about the
outsourcing, if you look in Unilab's 10-K, they
disclose that approximately 5% of the revenues is
associated with outsourcing test send outs, including
anatomic pathology that's sent out.
D. Zimbalist In terms of the bridge loan?
R. Hagemann The bridge loan is a one-year facility that's in place.
It has interest rates very consistent with the rates on
our existing credit facilities and we expect to
refinance it shortly after the transaction closes. It's
a committed financing at this point.
D. Zimbalist Thank you.
Coordinator We now have a question from Matt Gotlin from
Chesapeake Partners.
M. Gotlin Hello, congratulations. Could you give a little more
detail on the background of the transaction and then
who are the investment bankers on the transaction? You
said earlier you were going to launch the tender in
May; did I hear that correctly? Or will the tender be
closing in May towards the end of the quarter?
K. Freeman The tender will launch in May. In terms of the dialogue
between the parties, the intense discussions began at
the beginning of the year and have continued since to
this moment, to this day. You'll see all the details in
subsequent filings in terms of the gives and the takes
of the dialogue during that period of time.
M. Gotlin Who are the investment bankers, the firms?
R. Hagemann For us it was Merrill Lynch.
B. Whalen For Unilab it was Salomon Smith Barney and Credit
Suisse.
M. Gotlin Thank you and congratulations.
Coordinator We now have a question from Adam Jiwan from Soros
Management.
J. Gillory Hello. It's John Gillory; most of my questions have
been answered. Maybe you could confirm that the
exchange ratio is a fixed ratio. Is there any
subsequent pricing period or any collar?
R. Hagemann No, it's a fixed ratio with no collar.
J. Gillory Thank you.
Coordinator I'm sorry, Sir, has your question been answered?
J. Gillory Yes.
Coordinator Thank you very much. We now have a follow up question
from Drew Figdor from Tiedemann.
D. Figdor My question has been answered, thank you.
Coordinator Thank you, Sir. We now have a question from Mike
Shannon from Westchester Capital Management.
R. Barron This is Roy Barron; I work with Mike Shannon. He's had
to step out for a second. With regard to the 30% cash
consideration, am I to understand that that's 30% of
the total consideration paid in the deal? That the
number of shares that we'll receive, 26.50 goes down as
DGX goes down?
R. Hagemann It's 30% of the total valuation of the Unilab equity is
capped at 30% in cash and should folks elect more than
30%, they would be cut back to that 30% level. A
maximum of $295 million in cash that will be
distributed to the Unilab shareholders.
R. Barron So no matter where DGX is, Unilab holders can opt for
26.50 and receive 30% in cash.
R. Hagemann Yes.
R. Barron Great, thank you very much.
Coordinator We now have a question from Joe Gozzi from Alpine
Associates.
J. Gosey My question has been answered. Thank you.
Coordinator Thank you, Sir. Our next question is from Matthew Buten
from Argus Partners.
M. Buten A quick housekeeping question. Amortization and
goodwill, are you going to be adding goodwill to the
balance sheet and how much would be the annual
amortization amount?
R. Hagemann Between both the AML acquisition and the Unilab
acquisition, we'll be adding approximately $1.4 billion
to $1.5 billion in goodwill. The vast majority of the
purchase price is being allocated to goodwill and
there'll be no amortization attached to that in
accordance with the new accounting rules.
M. Buten Thank you and congratulations.
Coordinator We now have a question from Craig Nandey from Shore
Water Ltd.
C. Nandey Good morning, gentlemen, thank you. Just a very quick
question. How far along are you on your due diligence
and when do you anticipate completing it if you haven't
already? Thank you.
K. Freeman Due diligence was completed in advance of the
transaction.
C. Nandey Thank you.
Coordinator Thank you for participating in the Quest Diagnostics
investor conference call. Investors in the United
States may listen to a replay of this call by dialing
800-925-2388. Again, that number is 800-925-2388. The
replay will be open at 11:00 a.m. Eastern time and will
continue until 5:00 p.m. on May 17th. Investors outside
the United States may dial 402-220-4111. Again, that
number is 402-220-4111. No password is required for
either number. In addition, registered analysts may
access an online replay of the call through Street
Events at www.streetevents.com. The call will also be
available to the media and individual investors at
www.questdiagnostics.com. The online replay will be
available 24 hours a day beginning at noon. Thank you
very much and good-bye.