Ramsay should offload its Sante unit, says Morgan Stanley

The European arm consists of hospital business Ramsay Sante, of which Ramsay Health Care owns 52.8 per cent.

Morgan Stanley analysts have joined the chorus of Ramsay Health Care investors urging the company to consider a demerger of its European hospital assets.

In a research note, the analysts examine the merits surrounding a potential move to give investors back the European business by way of an “in specie distribution” of shares.

Some Ramsay investors have been lobbying for this for at least two years. The European arm consists of hospital business Ramsay Sante, of which Ramsay owns 52.8 per cent.

Ramsay has hired Goldman Sachs to explore options for the unit, including a sale in the past year. However, there are not thought to be buyers at the price where Ramsay would be prepared to sell.

Ramsay chief executive Natalie Davis told the Macquarie Australia Conference in May that challenges with Ramsay Sante were that group receives 25 to 30 per cent less in funding for the same work carried out in the government sector, which put pressure on the business, as it was “not paid fairly for the work”.

When Kohlberg Kravis Roberts considered buying Ramsay in 2022, it looked at giving back Ramsay Sante to shareholders, where they would receive 0.25 shares in Ramsay Sante, which is listed, for every Ramsay share, equating to about $5 per share.

It originally offered $88 per share, but then it came back with an alternative offer that Ramsay rejected, where shareholders would have received $78.20 per share and about 0.22 Ramsay Sante shares.

The analysts said that the spin off could create a potential rerating of Ramsay Sante.

Applying a multiple of 11 times earnings before interest, tax, depreciation and amortisation to Ramsay’s Australia and UK business, the analysts believe this could see shares trade at about $37. In addition to the $5 per share for Ramsay Sante, it took the overall value to $42. Ramsay last traded at $39.13.

The analysts assume Ramsay’s real estate is worth $5.3bn.

“While our analysis highlights potential upside from outcomes in relation to Ramsay’s holding in Ramsay Sante, the timing and potential outcomes remain uncertain,” the analysts said. “In addition, we continue to see wage inflation across the group as a constraint to margin recovery, with our earnings per share forecasts below consensus.”