Medical, dental, and veterinary supplies merchant Henry Schein remains an acquisition machine. Its latest deal involves Alpha Scientific, a healthcare products and services provider.
Schein believes the acquisition of privately held Alpha Scientific will strengthen its presence in California. Terms of the deal were not disclosed.
Alpha Scientific sells traditional medical/surgical, pharmaceutical and laboratory products to about 2,000 offices and medical laboratories. The $10 million distributor uses an integrated sales model that includes field sales and telesales representatives.
This marks Schein’s fourth acquisition since October. “Through the years, Schein has consistently added companies to run through tier distribution and fulfillment operations,” says Stuart Rose, managing director with investment bank Tully & Holland.
With Schein trading at 11 times EBITDA (earnings before interest, taxes, depreciation, and amortization), Rose draws two conclusions regarding the company’s prowess for acquisitions. The merchant needs to continually grow or it will see a hit to its stock price, he believes. “They can arbitrage acquisition valuations, buy companies at five to eight times EBITDA and then turn that into 11 times EBITDA when the acquired companies become part of Schein.”
Rose says multiples are based on a number of factors, but growth is surely one of the most important. “Schein must show continual growth to keep a high multiple of earnings. If growth slows, multiples fall, and the stock price falls.”
If Schein can buy a company at five times earnings, it might pay $5 million for $1 million in earnings. “Since Schein trades at 11 times earnings (EBITDA),” Rose adds, “the $5 million it paid for $1 million in earnings magically transforms into $11 million, hence the arbitrage.”