Not-for-profit operators in frame to take on Healthscope hospitals

Healthscope has not-for-profit groups putting up their hand up to take on its hospitals. Picture: iStock

Not-for-profit healthcare operators remain heavily engaged in plans to take on the hospitals of Healthscope since lenders have been forced to step in and orchestrate a break-up because of Brookfield throwing them the keys and walking away.

Well-informed industry sources believe that the company could take a similar path to the childcare centres business ABC Learning that collapsed in 2008 amid the Global Financial Crisis.

While private equity firm Archer Capital bid for ABC Learning, it was the charities – Mission Australia, Brotherhood of St Laurence, Benevolent Society and Social Ventures Australia – that won the right to take control following its collapse with debts worth $1.6bn.

At the time, the Rudd government provided $15m of taxpayer funds for a loan to help fund a charitable takeover of what was then the nation’s biggest childcare chain; the new entity was named GoodStart Early Learning.

A dozen philanthropists – including Robin Crawford, a founding director of Macquarie Bank, Seek founder and BRW Young Rich-lister Matthew Rockman, and former Microsoft boss Daniel Petre – also lent cash to the GoodStart consortium.

As a charity, GoodStart’s advantage was that it did not have to pay taxes and would plough any profits back into the childcare centres.

The deal reversed the Howard government’s drive towards privatised childcare, increasing the non-profit sector of the market from 25 per cent to 40 per cent.

The winning bid to take over the 678 ABC daycare centres was understood to be about $100m – about one-tenth of the valuation declared in ABC Learning’s annual report, two years earlier.

As it is the case with GoodStart, Healthscope also has not-for-profit groups putting up their hand up to take on its hospitals.

And as with GoodStart, private equity firms have been around the hoop but have cooled, as the level of the group’s distress became more evident.

The other similarity is that both have insolvency firm McGrath Nicol involved, with the firm representing Healthscope’s syndicate of 20-odd lenders owed about $1.4bn along with restructuring firm Houlihan Lokey.

DataRoom understands that consortiums of not-for-profit hospital operators submitted bids for Healthscope when it was placed up for sale in recent months by its then private equity owner Brookfield, through Moelis.

However, the understanding is that suitors wanted only the hospitals if they could secure the ­assets with discounts of 10 to 15 per cent on their rents.

Investment banks are engaged to provide advice, and among those interested have been St ­Vincent’s, St John of God and ­Epworth.

Their advantage over private equity firms is that not-for-profit groups do not pay payroll tax, which, in the case of Healthscope, when synergies are taken into account, could create a saving of $100m on annual earnings before interest, tax, depreciation and amortisation, a source with an interest in the situation says.

However, the challenge for not-for-profit groups is that they are asset rich but cash poor, and could not take on additional debt to buy the hospitals.

Even if they could secure them at a price of zero, they would still need extra funding for working capital.

One possible outcome could be that superannuation funds such as nurses union Hesta and Australian Retirement Trust could offer some sort of social loan with minimal.

It could still be a good investment for a super fund, as the not-for-profit groups would be not paying a lot for the hospitals, so it would be like providing private credit.

Healthscope is the country’s second-largest private hospital operator and was purchased by Brookfield in 2019 for $4.4bn.

At the time, it sold its properties for about $2bn to fund the transaction and its New Zealand pathology business for a further $530m, and it geared up the business with more debt.

However, since then, it has struggled with higher staff costs and the impact to the industry from the global pandemic, compounded by its rent and debt payments, and claims that funding from private health insurers was not enough to cover its costs.

It has injected more than $250m back into the business to keep it afloat and pleaded for rent cuts from landlords and won a short-term interest payment reprieve from lenders.