Inside KKR’s ‘carefully’ crafted $20bn bid for Australia’s biggest private hospital operator Ramsay Health Care

Kohlberg Kravis Roberts has recruited a key ally – the nurses and health workers industry superannuation fund HESTA – for a $20bn takeover of Ramsay Health Care.

Ramsay shares soared more than 24 per cent to $80 on Wednesday after the company revealed it had received an indicative bid from the KKR-led consortium.

Kohlberg Kravis Roberts has recruited a key ally – the nurses and health workers industry superannuation fund HESTA – to its consortium for a $20bn takeover of Australia’s biggest private hospital group, Ramsay Health Care.

Ramsay shares soared more than 24 per cent to $80 on Wednesday after the company revealed it had received an indicative bid from the KKR-led consortium, which also includes international pension funds.

The recruitment of HESTA to the consortium gives nurses a chance to indirectly own shares in Ramsay at a time when the company, and other providers, are battling chronic labour shortages.

Crucially, HESTA’s involvement negates potential criticism from the nurses union – which has attacked private equity ownership of hospitals in the past – given NSW Nurses and Midwives Association secretary Brett Holmes is on the fund’s board.

KKR had been crafting the bid – tipped by The Australian’s DataRoom column in December – for almost a year. The New York-headquartered firm has also been wooing the Paul Ramsay Foundation, which owns about 19 per cent of the company and has declared its support for the deal.

“Assessment of any conditional indicative offer is up to the board of (Ramsay Health Care). However, should an offer materialise along the lines canvassed in RHC’s ASX announcement, PRF would support such an offer being put to shareholders,” the foundation said in a statement.

Jerome Kohlberg founded Kohlberg Kravis Roberts & Co. in 1976 with Henry Kravis and George Roberts. His firm spent a year on crafting its indicative offer for Ramsay Health Care. Picture: Kohlberg Foundation

The potential takeover puts a sale and leaseback of Ramsay’s real estate portfolio back on the agenda – a move analysts expect could generate up to $8.5bn, helping fund the transaction. While the price tag of $88 a share, or $20.14bn, seems high, analysts say it is not “prohibitively expensive” based on earnings multiples and it is likely other bidders will emerge given Ramsay’s international network and quality of its assets.

Private equity and super funds have been keen to acquire Australian infrastructure assets, with Canadian investment manager Brookfield buying Victorian power grid owner AusNet for $18bn and another consortium taking over Sydney Airport for $23.6bn in February.

Brookfield – which took over Ramsay’s smaller rival Healthscope for $4.4bn in 2019 – also made an unsuccessful bid with ­Atlassian co-founder Mike Cannon-Brookes to buy AGL Energy for $8.1bn last month.

Crown Resorts’ real estate portfolio was also said to have been a drawcard in Blackstone’s $8.9bn bid for the company. But Blackstone has ruled out a sale and leaseback – for the time being – despite striking a $5.4bn debt funding agreement with Starwood Capital Group and two of its non-listed real estate investment trusts ahead of the deal.

In regard to the Ramsay deal, Shaw and Partners investment manager James Nicolaou said: “KKR no doubt are attracted to the significant unrealised value in RHC’s (Ramsay’s) freehold property portfolio, which wasn’t being accounted for in the share price.”

Jarden Australia analyst Steve Wheen said if the transaction was successful and KKR pursued a sale and leaseback, it could generate $7.5bn-$8.5bn.

Mr Wheen estimated the value based in part on the sale and lease of Healthscope’s hospitals that Brookfield completed after it took over the group in mid-2019.

Private equity has been keen to adopt such moves, given the attractive price tag they can net before later divesting the company at a higher price than they acquired it for. “With (Ramsay) unwilling to pursue sale and leaseback on the basis of taxation leakage, if the transaction … is to proceed, one way it could potentially be funded to a large degree is by the implementation of an op-co⁄prop-co sale and leaseback ­arrangement,” Mr Wheen wrote in a note to investors.

“With cap rates now about 4 per cent – remembering the sale and leaseback of Healthscope’s hospitals in 2019 was done at an average cap rate of 5 per cent – we estimate the cash funding that could be crystallised could be in the range of $7.5bn-$8.5bn.”

Henry Kravis, founding partner of Kohlberg Kravis Roberts & Co. Picture: Bloomberg

The proposed takeover comes as private hospital groups have been under pressure following government-enforced pandemic elective surgery bans, which cost Ramsay at least $155m.

At the same time, health insurers have been accused of clawing back millions of dollars from private hospitals via so-called “gotcha” audits as they take ­advantage of an overstretched health system. “(Ramsay) has been under significant earnings pressure from Covid as governments took control of its beds in expectation of surging Covid cases,” Mr Wheen said.

Ramsay said that following discussions with its advisers, it would grant KKR due diligence.

“The discussions between Ramsay and the consortium are preliminary in nature,” it said.

“There is no guarantee that any further proposal will be forthcoming, that any further proposal will be recommended by the board or that a transaction will eventuate. The indicative proposal was expressed to be confidential and the consortium has reserved the right to withdraw the proposal in the event it ceased to be confidential, which has now occurred.”

If the deal proceeds, Ramsay would be permitted to pay a special fully franked dividend to distribute all available franking credits to shareholders. Its franking account balance as of December 31 is $823m.

The consortium has also proposed Ramsay shareholders would have the option to receive part of the consideration in unlisted scrip in the consortium holding entity, which appealed to the Paul Ramsay Foundation.

Ramsay, founded by the late Paul Ramsay in 1964, owns 72 private hospitals in Australia and has extensive operations in the UK and Europe. Its global network extends across 10 countries, with more than eight million admissions/patient visits to its facilities across more than 32 locations.

Milford Asset Management portfolio manager Jason Kururangi expected other bidders to surface. He said the KKR consortium offer “is likely welcome news amongst many shareholders with Ramsay underperforming against equivalents over several years”.

Wilson analysts Shane Storey and Melissa Benson also said more bids were “feasible”, although it was unlikely to attract interest from rival hospital groups.

Health companies are becoming sought after among private ­equity investors. BGH Capital is currently slugging it out with London-based rival CapVest for Australia’s biggest IVF group, Virtus.

Ramsay is also exploring a potential sale of its Malaysian, Indonesian and Hong Kong assets, Ramsay Sime Darby, which it owns in a 50-50 joint venture with Malaysian multinational conglomerate Sime Darby Berhad.