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Takeovers usually come in two varieties – hostile or friendly. The former is where an interested party aggressively purchases shares in a company against the will of its management or shareholders, hoping to win a controlling stake.
The latter is closer to date night at the local bar – a few casual glances and a wink. Nothing too serious, just some motions to test the waters. As far as corporate flirtations go, Healthscope is getting some serious interest from Australia's largest superannuation fund.
The hospital operator has received a proposal from a group of financial investors to buy the company via a scheme of arrangement. The proposal is said to be a ‘preliminary, non-binding indication of interest’ and is subject to several conditions, which we’ll get to in a moment.
The bidding consortium includes a couple of large asset managers, two Canadian pension plans, and AustralianSuper which is Healthscope’s largest shareholder, owning 14% of the stock.
The group has made an all-cash offer of $2.36 per share, which will be reduced to account for any dividends paid between now and completion. Curiously, this is only a 16% premium to the previous closing share price, which is low by takeover standards.
The small premium might betray the consortium’s confidence that there won’t be a superior bid. Given AustralianSuper’s existing shareholding, which would deter rivals, any cockiness is probably justified.
It’s also unlikely a higher bid will come from larger competitor Ramsay Health Care. Combined, Ramsay and Healthscope account for just under half of the private hospital market in Australia, so a bid would probably raise a few eyebrows at the Australian Competition and Consumer Commission (ACCC).
Healthscope’s results have been lacklustre for a few years now, but the company has more than $300m of expansion projects underway. Among them is the flagship Northern Beaches Hospital in Sydney, which will add around 10% to bed capacity and should ensure good revenue growth in 2019 and beyond as admissions build.
Management recently announced that construction, which completes in October, is on time and within budget. Cost blow-outs are common in this industry, so it’s probably no coincidence that the bidders waited to see that this billion-dollar addition was in the clear. The wrap-up of construction also means Healthscope is poised to switch from being cash flow negative to cash flow positive.
As we explained in our update on Healthscope’s interim result, we expect long-term admissions growth of 3–4% and revenue to grow a little faster than capacity due to negotiated price increases with private health insurers. Net profit should grow slightly faster still due to a hospital’s relatively fixed cost base, so we expect long-term earnings growth of 6–8%.
The $2.36 offer price values the company at $4.1bn or around 23 times consensus estimates for 2018 earnings. We think that’s a fair price given Healthscope’s economies of scale, stable income streams and growth potential.
There’s no need to act now, though. The board is reviewing the offer and its unanimous support is one condition to a binding proposal being made. Other conditions include the consortium’s ongoing due diligence, its ability to arrange debt financing, and receipt of various regulatory approvals, including those from the Foreign Investment Review Board.
There’s no rush and, who knows, the board may push for a higher price or the consortium’s bid may be trumped by one from a foreign hospital group wanting to expand into the Australian market. We’ll keep you informed as the takeover progresses. For now, Healthscope remains slightly undervalued and we’re sticking with HOLD.
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