Ramsay remains undervalued despite failed acquisition bid
Morningstar has maintained its fair value estimate for global hospital group Ramsay Health Care after an unsuccessful acquisition bid by its French subsidiary.
Mentioned: Ramsay Health Care Ltd (RHC)
Morningstar analysts have maintained their fair value estimate for global hospital group Ramsay Health Care (ASX: RHC) after its French subsidiary made an unsuccessful bid to acquire pan-European healthcare service provider Capio.
Ramsay's commitment to Ramsay Generale de Sante's proposed takeover offer was not enough to move Morningstar's valuation, says Morningstar healthcare equity analyst Chris Kallos.
"Ramsay's contribution to the 661 million euro ($1.04 billion) offer was capped at 257 million euro, equivalent to around $404 million, based on a pro rata share of the deal, which was to be funded via debt.
"Despite not changing our valuation, the relatively small size of the current bid would mute the impact on our fair value estimate," Kallos says.
Ramsay currently owns 50.9 per cent of Ramsay Generale de Sante, having acquired the French private hospital operator as part of its Credit Agricole Assurance purchase in 2014.
Ramsay Generale de Sante made the unsolicited offer to acquire Capio on Monday, in a deal that would have been jointly funded via debt and equity. The group is based in Gothenburg, Sweden, and operates hospitals and clinics across Sweden, Norway, France, Germany and Britain.
At 48.5 Swedish krona per share, and with Capio's net debt of around 361 million euro, the offer represented an enterprise value/earnings multiple of 8.8 times.
"We think, on a comparable basis to Ramsay, and given Capio's relatively lower growth and earnings margin profile [this multiple] is appropriate, and we consider the initial bid fair," says Kallos.
Capio quickly rejected Ramsay's offer: "The board believes the offer does not adequately reflect the fundamental value of Capio."
While Kallos maintains the initial offer was fairly priced, he believes Ramsay could comfortably increase its cap.
"Given potential synergies in France, we think the company could add up to $600 million in debt.
"All else equal, this equates to a net debt-to-earnings level of around 2.4 times, a level management has previously indicated it is comfortable with," Kallos says.
Shares in Ramsay were trading at $55.84 at yesterday's close, a 32 per cent discount to Morningstar's $82 FVE.
Acquisition makes strategic sense
Morningstar's Kallos has praised the move, noting that the proposed acquisition of Capio makes strategic sense for Ramsay, providing access to new markets while adding modest scale to its existing French operations.
"We think Capio allows an expansion of Ramsay's European business across the healthcare service continuum beyond private hospitals and into primary-care settings, extending the commercial opportunity from acute-care settings through to chronic disease management.
"We see this as an attractive opportunity given the ageing population," Kallos says.
He expects the integration would be executed with minimal disruption to the operations of Capio, which would itself benefit from Ramsay's current cost-out initiatives.
"In France, Capio operates eight emergency hospitals, 12 local hospitals, and three specialist clinics for rehabilitation and psychiatry, complementing Ramsay’s 119 hospitals in the region," Kallos says.
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Emma Rapaport is a reporter for Morningstar Australia
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