We interview BC Partners director Ewald Walgenbach about BC’s creation of Synlab, Europe’s third largest lab group.

BC Partners daringly swooped on German lab group Synlab, Pan-East European outfit FutureLab and Italian lab group Fleming Brescia late last year. In doing so it snatched Futurelab from under the nose of Mid Europa, Synlab from Warburg Pincus and beat 3i-backed Labco to Fleming. The rapid fire deals has created a new European laboratory chain with sales of €430-440m in 2009.

Small wonder perhaps that outraged competitors question the strategy. Walgenbach is prepared to admit that, at times, it all looked a little unorthodox: 'These are smaller deals that we would normally do but we realised that by doing Futurelab and Synlab we would create a substantial opportunity.' The risk was that Synlab only wanted to sell a minority 40% stake and that Futurelab’s accounts were somewhat suspect. If Futurelab had failed due diligence, then BC could have been left with a minority stake in a mid-sized German lab group, instead of the current situation where it has 70% stake in a Pan-European player.

Ruffled rivals suggested that Futurelab’s accounts were 'Ukrainian' and that Synlab had run up steep debts. But we understand that BC found that Futurelab’s books were clean and that it exceeded 2009 profit expectations making over EUR30m of EBITA on sales of EUR140m. Walgenbach isn’t prepared to comment on Synlab, but we hear that debt to EBITDA ratio at acquisition was just 2 times, which would be perfectly acceptable.

Questions about the overall profitability of the new group are unlikely to go away fast. Much of Futurelab’s profits were made in the Czech Republic which is now witnesseing swingeing cuts in lab test prices. Futurelab sales were also hit by the 17% 2009 Swiss price cuts. But we understand that these Swiss cuts have led to consolidation and that Futurelab has managed to limit the sales fall to less than 10%.

Futurelab’s operation in Hungary is very low margin, thanks to the very low prices set by the authorities. Walgenbach shrugs off concerns: 'Hungary has to pay prices which let the labs survive. And if a large, well managed lab like the one we are running makes very little money what about the smaller ones? Eventually there will have to be changes.'

Fleming Brescia, the largest reference lab in Italy, is seen by outsiders as the only really high quality asset in the new operation. Fleming told us that it made an EBITDA margin of 21% on sales of €52m. Reliable sources say that BC dashed in just ahead of Labco and paid 9-10 times EBITDA for the business, although Walgenbach won't comment.

Growing acquisitions in Italy is difficult as each lab is given its own budget limits. If it exceeds these, then it is paid a fraction of the price. But there is a taper and Walgenbach implies that organic growth of up to 10% is entirely feasible. In any case, Fleming probably provides a spring board for further deals.

Walgenbach says that, going forwards, the new company, known as Synlab, will be run by a mixed team: 'The chief executive is Dr Bartl Wimmer, the CEO of Synlab and the chief financial officer is from Futurelab, as is the manager for Eastern Europe. Really, it is quite a mixed team as there was not much geographic overlap between Synlab and Futurelab. However, Dr Havel, the head of Futurelab, is retiring. Synlab’s ownership was, and is, quite spread out with more than 20 doctors remaining who are partners.'

For the moment Walgenbach is in love with BC's new investments. Asked what he sees as the attractions he says: 'Well, it’s a growth market. Aging demographics in Europe drive growth as does the development of new tests. We think the market will generally continue growing by 3-4%. And there is consolidation. In most markets we think the top five have no more than 20-25% marketshare. Also of course economies of scale. And then there is outsourcing from the public sector hospitals. That also still has a long way to go, particularly in Germany.'

BC appears to have called a halt on big deals for the time being. Walgenbach says: 'For now we have a three way merger to consolidate, so, for this year, you won’t see any big steps, but longer-term, yes, why not? There are always opportunities to expand into new countries.'

The exit strategy is also clear. In the current climate he says:'I think a listing is the obvious route today.' Hardly surprising, given that BC is about to float Medica on the Paris Bourse and is also readying other flotations this year. BC appears to have 'got' the new environment post-crash faster and better than many of its competitors – deals can still be done at good prices, but the days of 3-5 times returns are probably gone.

So will it all work? In the lab sector everything really hangs on price levels. In most countries these are dropping at 2-3% a year and that is entirely acceptable for the big groups. Indeed, it merely accentuates the consolidation process as small, uneconomic labs are forced to sell up. The danger is that more countries will follow the examples of Czech statutory and Spanish private insurers who are looking for cuts of between 10%-20%.

Now that would make life interesting....