Cello buys MedErgy to build up health services business

Pharmaceutical and health-related research activity operates at a higher margin than other client sector work, generating approximately 42% of the research division’s gross profit, Cello said.

“The acquisition of MedErgy will accelerate the group’s growth strategy, extending its healthcare reach and international capabilities,” according to a statement.

MedErgy delivered $2.3m of pre-tax profits on gross profits of $9m in 2010. Cello is paying $5.5m in cash upfront for the business along with 5.8m in shares – worth $3.2m at the current trading price of 55p-per-share. 88% of the initial consideration goes to MedErgy owner DVC Worldwide, with the remaining 12% going to the management team led by CEO Julia Ralston.

Cello CEO Mark Scott holds a 0.08% interest in DVC Worldwide, but has pledged to donate his proceeds from the sale (estimated to be worth about $6,000 at the current share price) to the Kevin Steeds Lymphoma Fund set up in memory of the Cello founder and chairman, who died of the disease in December 2008.

A further $3.5m will also become payable, split 50/50 between DVC and MedErgy management, should the business hit performance targets by April 2014. The acquisition is being part-funded by a placing of 5.3m new Cello shares.

The deal was announced today alongside Cello’s 2010 results. Revenue for the year was up just 1% to £124.96m, gross profit was almost flat at £60.3m, while operating profit was £5.74m and net income was £3.6m – a significant improvement on losses of £4.9m and £6.3m as reported last year.

Research and consulting revenue was flat at £59.9m, while gross profit was up marginally to £36.8m and operating profit was £5.5m against a £1.5m loss a year ago. The Tangible communications business grew revenue 2% to £65.3m. Gross profit was flat at £23.4m while operating profit was £2.1m versus a loss last year of £2m.