In Diagnostic Supply, A Powerhouse is Launched

The merger of two leading diagnostic suppliers has created a national presence in the troubled diagnostic imaging distribution segment. Platinium Equities paid $250 million to buy the dx imaging distribution businesses of Philips Medical and PSS, but even at that cheap price, the road to success is fraught with obstacles. Notably, the imaging film segment is under considerable competitive pressure from the increasing popularity of PACS.

If you want a sense of how depressed valuations have become in the low-margin world of diagnostic imaging supply distribution, just consider this: if you were interested, you could have purchased $1.25 billion in annual sales and a dominant market share position for around $250 million.

That is the coup pulled off by Platinum Equity LLC, a privately held buyout firm with holdings generating more than $4 billion in annual sales. It has successively purchased the diagnostic distribution businesses of Picker International Inc. (its HCP division) from Philips Medical Systems Inc. [See Deal], and the Diagnostics Imaging (DI) unit of Florida-based physician supplier PSS World Medical Inc. —a deal that took place in December [See Deal].

Neither sale was unexpected. Though Philips and PSS seemed to have surface synergies with their distribution holdings, neither quite knew what to do with them and did little to hide their desire to divest. Philips got the HCP unit when it acquired Marconi Medical Systems Inc. (formerly known as Picker International Inc.) last year (See "At Least For Some, An Independence Day Celebration at Marconi," IN VIVO, September 2001 (Also see "At Least for Some, an Independence Day Celebration at Marconi" - In Vivo, 1 Sep, 2001.).), and the diagnostic imaging giant clearly had little interest in trying to mix the distribution business with its higher margin capital equipment lines [See Deal]. For PSS, DI once made sense as part of a wildly ambitious plan to capitalize on all aspects of the physician supply/alternate site markets. But tough times, followed by a concerted turnaround effort, left few doubting that PSS would eventually try to get rid of its once-promising business—particularly when company officials realized how much of the diagnostic supplies business is hospital-based, not physician office-based. (See "The Fall and Rise of a Physician Supply Company, Part II" (Also see "PSS Redux--The Fall and Rise of a Physician Supply Company, Part II" - In Vivo, 1 Jun, 2002.) IN VIVO, June 2002.)

Blending the two, in a company that will reportedly be called SourceOne, certainly creates a diagnostic supply powerhouse by any measure. The former HCP business has some 900 employees and did around $550-600 million in sales annually. The DI business was even bigger: 1,600 employees and $700-725 million in sales. Plus, the two complement each other geographically, meaning there's not likely to be a significant customer who can't be easily reached by one of the two companies.

Industry observers note that the two companies together create a powerful force, especially in the distribution of film. But that's not to say the road will be easy. Indeed, the new company, strong as it is, faces a number of challenges—first and foremost, the US film industry, which is depressed and declining and facing a major challenge from digital technology. Indeed, cheap as the price was—PSS' DI division cost just over $110 million in cash and assumed liabilities—few are arguing Platinum got a steal.

Perhaps the biggest challenge, say industry observers close to both distributors: keeping the new company together as a cohesive force, especially given how critical local market presence is in distribution. DI, in particular, was put together quickly and somewhat haphazardly in a rollup of former independent distributors that never quite gelled. Complete market coverage and strong national presence will be meaningless if SourceOne is unable to keep former executives of those distributors from going off and starting local businesses to rival the new company. Says one industry executive, "A lot of these guys have been through this [i.e., an ambitious national strategy] before when PSS bought them, and it didn't work out."