Three Sydney-based private equity firms are taking on not-for-profit operators to buy hospitals within Healthscope, ahead of a sale process set to begin in the coming weeks.
The Pacific Equity Partners-owned business Healthe Care is understood to be interested in 12 hospitals in the portfolio that includes 37 operations, while also now showing interest are smaller rivals Genesis Capital and Mercury Capital.
Interest from Genesis and Mercury centre on the mental health facilities, say sources, which they hope to secure at an opportunistic price, while PEP’s interest is in the surgical hospitals.
Healthe Care is the third-largest hospital operator in Australia, and had previously taken a cautious approach to making a big swing at Healthscope, what with the structural challenges playing out in the industry crimping profitability and the competitive advantages not-for-profit operators carry by not being obliged to deliver payroll tax contributions.
Mercury Capital owns the Avive Health business that says on its website that it extends mental health and wellbeing support to Australians and has locations in Brisbane, Byron Bay and Mornington Peninsula.
Sana Health Group describes itself as an Australasian leader in behavioural health and is owned by Genesis Capital, a buyout fund that owns dental care chain Pacific Smiles and was founded by former Crescent Capital executives.
It comes as representatives of the investment bank Houlihan Lokey, which is adviser to Healthscope’s lenders, have started knocking on doors of healthcare groups that may have dropped out of the sale process early or were not initially involved.
The investment bank is urging the groups to make offers in a quest to drum up competitive tension.
PEP bought the Healthe Care hospital business from Luye in 2021 for about $400m, but the deal excluded its mental health facilities that now form a separate business called Aurora Health.
Luye purchased the entire Healthe Care business from Archer Capital in 2015 for $938m, and made some efforts to sell Aurora about two years ago.
But later, Luye opted against the move.
Some European private equity groups have also been sniffing around in Healthscope contest, say sources.
The private equity bidders will all create competition for the not-for-profit healthcare providers that are interested in buying parts or all of the business.
Particularly motivated is said to be the Jefferies-advised Catholic orginsation Calvary, which has capacity to buy the entire portfolio, should it finance the deal with the balance sheet of its aged care services provider Japara Health.
Japara owns a lucrative real estate portfolio.
The exemption from payroll tax contributions could leave a not-for-profit $100m-a-year better off when it comes to running Healthscope than its rivals.
With a sale price multiple of 10 times earnings, this could add about $1bn of value to the sale price of the business, say market experts.
But the challenge for not-for-profit providers is that they are frequently asset rich but cash poor.
Anyone who takes on Healthscope would need an estimated $400m to pay for its capital spending needs, including repairs to the Pine Rivers Private Hospital in Brisbane, a mental health facility where sources say the roof leaks.
DataRoom had earlier revealed that among ten parties that had put forward initial bids for Healthscope when it was up for sale by its private equity owner Brookfield was Macquarie Group, along with Ramsay Health Care, St Vincent’s, St John of God, Calvary, Epworth, Cabrini Health and PEP was thought to have shown some interest.
Brookfield launched a sale process for Healthscope in March when the business it bought in 2019 for $4.4bn was unable to pay its rent or debt repayments.
The group sold 24 hospital properties to finance the deal in 2019 for $2bn, with the landlords of those assets now being Northwest Properties REIT and the interests of HMC Capital, including its HealthCo Healthcare and Wellness REIT.
Brookfield owed about $1.6bn to a consortium of about 20 lenders at least, including Australia’s top four banks, but handed lenders the keys in the days before it was placed into receivership last month.
Distressed debt investor Polus Capital has purchased about $300m of the loans for 40c in the dollar, while peers Canyon Partners and Elliott Management also bought some of the loans.
Working as receiver is McGrathNicol and administrator is KordaMentha.
Hurting private hospital operators has been higher staff costs and limited increases in payments for services from private health insurers that the industry argues have not kept up with inflation.
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