Healthscope plays hard to get
The board of Australia’s second largest private hospital operator has rejected two takeover bids, saying both proposals undervalue the company.
The board of Australia’s second largest private hospital operator has rejected two takeover bids, saying both proposals undervalue the company.
Healthscope refused to open its books to either the BHG consortium, which includes the company's largest shareholder, AustralianSuper, or Brookfield Asset Management, a Canadian private equity firm. It says the $4 billion-plus bids do not reflect the value of its property portfolio and an anticipated improvement in operating performance in 2018/19.
The BHG consortium made an offer at $2.36 a share, while Brookfield Asset Management bid $2.50 per share.
Shares in Healthscope (ASX: HSO), which had risen by nearly 28 per cent since the announcement of the initial BGH offer on April 26, were down 10 cents, or 4.1 per cent, at $2.36 at 1250 AEST.
Brookfield has suspended activity and is not expected at this stage to reconsider its offer.
“The directors have carefully considered each proposal and concluded that neither proposal adequately reflects the long term value of Healthscope, nor its underlying assets nor future potential,” Healthscope chairman Paula Dwyer says.
Instead, the board flagged the potential sale and leaseback of its 29 freehold owned hospital properties currently on the books, valued at $1.3 billion, and the potential sale of its Asian pathology assets, which Morningstar estimates could realise about $140 million.
Other reasons given
Healthscope has also announced a suite of measures to boost its performance, including the closure of Geelong Private Hospital and Cotham Private Hospital, and taking a $68 million impairment against Frankston Private Hospital.
The earnings loss from those hospitals, and softer than expected market conditions, has led to a downgrade of the company's guidance for 2017/18 hospital operating earnings, from about $359 million to between $340 million and $345 million.
Healthscope remains on track to complete its $840 million public-private Northern Beaches hospital, which is due to begin operation in October and expected to deliver a minimum 15 per cent earnings return on investment.
What do the analysts think?
Morningstar healthcare equities analyst Chris Kallos sees the board's rejection of the takeover offers as “playing hard to get” – holding out in hope that the bidders will come back to the table with a better offer.
He expects the transaction could still go ahead, leading to a possible delisting of Healthscope.
Aside from uncertainty surrounding the two takeover bids, Morningstar maintains its fair value estimate of $2.40, with a three-star (or hold) rating.
The back story
After first listing in 1994, with a niche differentiation strategy in the areas of psychiatric, rehabilitation and rural medical-surgical hospital provision, the business was acquired by a consortium of funds, advised and managed by TPG and The Carlyle Group in 2010, and subsequently de-listed.
Under private ownership, Healthscope enjoyed a period of sustained growth, including the completion of 21 brownfield projects, and was subsequently re-listed on the ASX in July 2014.
The market was given a reason to celebrate in October 2014 after Healthscope was selected ahead of Ramsay Health Care as the preferred bidder for the design, construction, financing and operation of a new 488 bed Northern Beaches Hospital in Frenchs Forest, Sydney. Once completed, the company will receive $400 million in cash from the NSW government as payment for the public elements of the hospital.
However, things started to go downhill from there. In October 2016 Healthscope provided a cautious trading update at its annual general meeting, following a softer-than-expected first quarter. The poor result was largely driven by a surprise reduction in patient visits across the hospital network in September and caused the company's share price to drop more than 25 per cent to $2.38.
Chief executive Robert Cook subsequently stood aside after six years at the helm to make way for former-Telstra executive Gordon Ballantyne.
Shares in Healthscope slid again in August 2017 to $1.86 after the company reported an almost 40 per cent fall in profit, and again in February 2018 after the company delivered a disappointing first-half fiscal 2018 result below analyst’s expectations, driven by nursing wage inflation, one-off planned brownfield expansion disruptions, and softer private hospital market.
Long-term outlook
Despite all the noise, industry fundamentals for private hospital operations remain favourable fuelled by an aging Australian population, advancements in surgical and medical techniques, and continued government support of private health insurers.
“The ageing demographic is the most important of these factors, given the growing percentage of the general population over the age of 65, which is estimated to reach 25 per cent by 2050,” Kallos says.
In addition, net capital accumulation, increasing asset prices, and greater superannuation coverage will likely further enhance the purchasing power of the elderly, and will lead to greater utilisation of both medical and hospital facilities, Kallos says.
In Morningstar’s view, the federal government’s supportive stance on private health insurance and the potential streamlining of the two-level (federal and state) regulatory system proposed in the May budget are both positive for the industry.
“Given Healthscope’s size and geographic reach, it is well positioned to benefit from these attractive market dynamics,” Kallos says.
As the second-largest player in what is essentially an oligopoly market, analysts’ view Healthscope as having a narrow economic moat.
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Emma Rapaport is a reporter for Morningstar Australia.
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