The appointment of UBS by Estia Health to defend the company following a $775.2m buyout proposal late last week has raised some eyebrows around the market.
The offer that comes from Bain Capital is the same private equity firm that has hired UBS to float its airline Virgin Australia.
Separate teams from the bank and the private equity firm are working on the transaction, so the conflict is likely to be more one of perception rather than reality.
But the question being asked is why did Estia decide to use the bank, knowing the company trying to buy the business is one of its valued clients?
Estia declined to comment.
Last week’s offer by Bain for Estia was a 28 per cent premium to its closing price of $2.34 before the $3 per share offer arrived.
It came only two months after the Kerry Stokes-backed Seven Group offloaded its 10 per cent stake in Estia for $2 a share.
Buying an aged care business in the current market is not for the faint hearted, but Bain Capital has shown in the past it is not afraid to take on challenging assignments in a quest for high returns.
The purchase of Virgin Australia in 2020 out of voluntary administration when the entire fleet was grounded is case in point.
After paying $700m equity for Virgin Australia, it had to endure another year of more or less a grounded fleet until travel finally started up again in 2022.
The aged care sector is struggling to meet the higher standards required to reach levels of compliance following a royal commission into the industry and shortages of staff.
The industry review resulted in a 15 per cent wage increase for staff, which the aged care sector anticipates will come through additional funding from government.
Private equity’s decision to move now is likely due to extra certainty around the new regulations.
An anticipation of more funding for the childcare industry by the Labor Government also has more private equity firms active in that area, with Quadrant Private Equity placing its Affinity childcare business up for sale and Partners Group’s Guardian childcare business is on offer.
Working for Bain Capital is investment bank Morgan Stanley, and should the deal go through, it will leave Regis Aged Care as the only aged care provider listed in Australia.
The other listed aged care provider, Japara Health, was purchased by Calvary in 2021 in a $380m buyout.
When Estia listed in 2014, it consisted of a collection of aged care providers merged together.
Conditions at the time were ripe for aged care providers, and Estia’s shares were sold at $4.75 each by owner Quadrant Private Equity, giving the company a value of more than $1bn, equating to 21 times its net profit.
However, the company’s share price plunged 17 per cent on its debut and were less than $3 in the two years that followed after it missed guidance, faced government funding cuts, raised capital to reduce debt and became subject to a strategic review.
UBS acted as the sole financial adviser on the float, and also worked as joint lead managers along with Morgan Stanley and Deutsche Bank.
Estia has 72 homes in South Australia, Victoria, New South Wales and Queensland with over 8000 residents.
Shares on Friday closed up 14 per cent to $2.67.