Film and PACS consolidation takes another turn as Agfa bids to acquire Sterling Diagnostic Imaging

The medical imaging industry’s active pace of consolidation in 1998 has continued into 1999. With the new year less than two weeks old, film and PACS company Agfa of Ridgefield Park, NJ, has made a bid to acquire rival Sterling Diagnostic Imaging of Greenville, SC. If completed, the deal would more than double Agfa’s market share in the U.S. film market and put the company on better footing in competing with Eastman Kodak.

Rumors about an Agfa/Sterling combination were rife at last month’s RSNA meeting (SCAN 12/16/98). While the companies declined to comment, many industry observers saw such a deal as almost necessary to counter the increased strength Kodak had mustered following its acquisition of the healthcare business of Imation.

Four weeks later, the rumors proved true. Agfa of Ridgefield Park, NJ, announced on Jan. 11 that it had signed a contract to purchase the capital stock of Sterling’s parent company, SDI Holding Corp. The deal, which is expected to close late in the first quarter or early second quarter, will not include Sterling’s DirectRay digital radiography technology or Helios dry laser printers, however.

The two firms had been working together on an OEM basis for two and a half years. Agfa provides Sterling with a dry imaging printer and also contributes film-handling equipment and processors. Talks had been under way for over a year and a half about a potential deal, said Agfa medical imaging business group managing director John Glass.

Agfa pursued the transaction for a number of reasons, he said. Sterling has a strong presence in North America, which offers nice geographical synergies with Agfa’s position in Europe.

Sterling’s success at landing large group purchasing organization contracts is another factor in Agfa’s interest, Glass said. Sterling has exclusive film supplier contracts with Columbia/HCA, Premier, and HSCA.

Agfa will also get Sterling’s Brevard, NC, manufacturing facility, which adds a North American x-ray film emulsion coating plant to the company’s manufacturing portfolio. This will allow the company to perform the majority of film manufacturing operations in the U.S. for its customers in North America. Agfa’s Bushy Park, SC facility serves as a finishing facility.

Agfa also gains access to Sterling’s overall organization, including its PACS team. This will add heft to Agfa’s growing presence in the North American market, Glass said. Terms of the deal were not disclosed.

The combined firms could pose a challenge to Kodak’s leading market-share position in film. Agfa and Sterling executives declined to comment on what the combined firm’s share of the U.S. medical imaging film market would be. Some market watchers estimate that Sterling has a market share in the low 30s, while Agfa’s is in the low teens. Kodak’s share of the U.S. market following the Imation deal is believed to be in the low to mid-40s.

The timing for the deal is also fortuitous, with Agfa’s divestiture from Bayer and initial public offering planned in the second quarter (SCAN 9/30/98). Sterling’s annual revenues of $500 million, and the company’s formidable film market share, might prove an added attraction to investors.

While film represents the lion’s share of imaging revenues right now, PACS is destined to be the future for any film company. In this respect, the deal also represents a good fit. Agfa’s PACS program is much more advanced than that of Sterling’s, so Agfa could successfully sell its Impax product line to Sterling customers that are interested in moving into digital imaging.

“PACS is about relationships,” said Michael Cannavo, president of Image Management Consultants of Winter Park, FL. “If you can buy the established relationship, then you have an inside track on selling PACS.”

Following the close of the transaction, a transition team will examine integration issues between the companies. No decisions have been made about the integration of the PACS product lines as yet. Both lines will certainly continue to be supported, Glass said.

Also up in the air is the ultimate outcome of Sterling’s Direct Radiography and Sterling Dry Imaging Systems (SDIS) organizations. Both of these divisions will be spun off prior to the deal and sold to an OEM firm, according to Rodney Wolford, chairman and CEO of Sterling. Investment bankers have been retained by Sterling to facilitate this process, and the company has already had discussions with several firms regarding a possible sale, he said.

Agfa’s decision not to acquire the DR business is by no means a reflection of the technology, Glass said. In fact, the company believes that DR and CR will co-exist in the marketplace.

“But we believe that we have some interesting CR technology in our pipeline in the next few years that will make CR even more competitive with DR,” he said. “We chose to put our resources into the development of those products.”

Agfa does plan to participate in the DR market in the long-term, however. Glass declined to comment on what approach the company would take to achieve that goal.

In the dry imaging sector, Agfa is pleased with its own product portfolio and doesn’t see value in acquiring the SDIS organization, he said.

Despite these decisions, Agfa will support Sterling customers who have made commitments to Helios and DR. The company has entered into a commitment with the remaining Sterling entities for consumables, service, and parts for DR and Helios customers.