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Ramsay capitalises on disruption with huge UK acquisition
Ramsay Health Care (ASX: RHC) puts excess capital to work
The global private hospital owner last week announced that it has reached an agreement with the Spire Healthcare Group plc (LSE: SPI) to buy the company. RHC has offered an all-cash offer of 240 pence per share to acquire 100% of Spire Healthcare Group plc shares via a scheme of arrangement.
Listed on the London Stock Exchange, Spire is an independent hospital group focused on the private patient market, operating 39 private hospitals and eight clinics across England, Wales, and Scotland.
The price represents a premium of 24.4% to the pre-bid price, valuing Spire’s fully diluted share capital at about $1.8 billion. The business as a whole is valued at $3.79 billion on an enterprise value basis.
The Spire board is unanimously backing Ramsay’s offer and is recommending shareholders vote in favour of the scheme.
Management have highlighted a number of benefits to RHC shareholders:
- It will transform Ramsay’s UK business into a market-leading private healthcare provider.
- It diversifies Ramsay UK’s “payor” sources, and case mix, expanding the geographic reach of its capabilities and improving capacity utilisation;
- Establishing an enhanced offering for private patients in the UK;
- Delivering scale to further invest in clinical research, development and innovation to improve patient outcomes; and
- Benefits of at least £26 million a year from procurement savings on products;
According to CEO of Ramsay UK, Andy Jones, “the combination of both businesses will deliver a significant step-up in UK-generated revenue” with stronger negotiating power with the local government and health authorities.
Brokers views on the deal are quite mixed:
- Macquarie has an “outperform” recommendation with a target price of $74.85, versus the market price of $62.73. The broker sees the purchase of Spire provides both “strategic and financial benefits, and supporting the medium-longer term growth outlook.” It will also provide increased scale and diversification. The synergy benefits of roughly £26 million per year are expected to be achieved irrespective of the UK CMA approval process, highlights Macquarie.
- Morgans has a “hold” recommendation with a target price of $65.54. The hold recommendation is due to the increase in debt that Ramsay will need to take on board., which the broker feels puts strain on the company’s credit rating and has pre-empted a strategic review of all assets. The broker also leans on the cautious side, saying “overall returns are only realised fully in outer years and are potentially at risk. They are contingent on the UK Competition and Markets Authority (CMA) review, which is considered more than likely to require divestments.”
Ramsay shares largely traded sideways since the pandemic, trading between $63 and $70. RHC’s pre-COVID high was $80.93, hit on the 12 February 2020; its low of $50.87 was struck on March 20, 2020.
Morgans says this quarter’s earnings continue to be impacted by the pandemic, in all regions. “The purchase of Spire will provide significant upside to future earnings but due the impacted of snap lockdowns the ongoing recovery in surgical and non-surgical admissions will be slow,” says the broker.
Further Morgans points:
“Activity levels in Victoria (ex Mildura) are gradually returning but continue to lag other states. The current lockdown in place in Victoria will no doubt hinder earnings.
“Ramsay Santé and Ramsay UK have continued to support the public sector response to COVID outbreaks with capacity and expertise and are faring a lot better. The EU and the UK Government have in fact recognised Ramsay’s contribution and financial support has been provided for the ongoing utilisation of Ramsay’s facilities. RHC posted a 4.6% increase in total patient revenue for the 3QFY21, driven by 3QFY21 surgical admissions per work-day.
“Ramsay appears well placed to handle public and private surgical backlogs and non-surgical services as the severity of the pandemic impact reduces. The company has a strong balance sheet and cashflow and the Spire agreement will add further diversification to the UK portfolio.”
