Shareholders tipped to back BGH Capital’s $4.1bn bid for Healthscope

Healthscope CEO Gordon Ballantyne. (Aaron Francis/The Australian)

Market analysts are betting that Healthscope’s shareholders will back the $4.1 billion takeover bid by BGH Capital, with the expectation being that the company’s board members will deliver their verdict on the offer by next week at the earliest.

At the Macquarie Australia investment conference in Sydney on Wednesday, institutional fund managers told DataRoom they believed that taking the offer from the Ben Gray-backed private equity fund was a better option compared to retaining the stock and facing the risk that shares would continue to underperform.

The stock (HSO) has traded below the $2.10 offer price of its 2014 initial public offering for much of the past year and the expectation among market observers is that the company faces operating headwinds in the years ahead.

This will be particularly the case should a Labor Government be elected, which would potentially trigger higher employment costs for nurses.

Compounding matters is that Healthscope’s operating earnings margins are in decline, falling 2.5 per cent over 18 months, while rival Ramsay has seen margins improve in the same time frame 3.3 per cent.

Healthscope’s EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) margin is currently around 16 per cent, while Ramsay confirmed in a recent presentation that its Australian hospital margin was around 20 per cent.

Part of the problem has been fewer patients through the Healthscope hospitals, partly due to a change in policies by some insurers which stipulates patients would only be covered for some procedures if they were conducted in the day surgeries (a cheaper option) rather than private hospitals.

Chart showing Healthscope’s operating performance

Some have suggested that running Healthscope is a tough role for Gordon Ballantyne, who is a former Telstra executive and could find some of the nuances of leading a healthcare business more challenging than other industries.

A possibility is that the company delivers a recommendation to shareholders on the bid next week when it updates the market on its operating performance for the year to April, which some believe could be behind budget.

BGH Capital offered $2.36 per share for Healthscope last week in a deal backed by 15 per cent shareholder Australian Super, which has agreed to support only the offer by BGH Capital.

The offer was a 16 per cent premium to its last closing share price, but 25 per cent premium to the price of the stock before DataRoom broke the story about a week earlier that Healthscope was in play.

It is widely expected that the private equity fund BGH, run by the former executives of TPG Capital, which were in charge of Australia at TPG when it previously owned Healthscope with The Carlyle Group, will likely sell off the company’s lucrative $1.2 billion property portfolio.

Onlookers now believe that Healthscope’s adviser, UBS, is once again revisiting the same option for the company as a defensive play before the board delivers a verdict on the approach.

Ramsay’s operating performance continues to improve

This is after UBS helped consider a split for TPG and Carlyle when it floated the business the last time around.

Major property groups spoken to by this column say they have no intention to embark on a rival bid for the company with an operator, claiming that the Australian Super exclusivity deed, which prevents the super fund from accepting a rival offer from another consortium, makes any competing bid a challenge.

But the market still appears to be betting that a higher offer will be received, with shares trading at $2.47 in early afternoon trade, higher than the bid price.

Last year, listed real estate trusts contemplated a bid for Healthscope with an Asian based operator.

The expectation by some is that regardless of whether the takeover succeeds, the property arm of the operation will be sold off.

But sources close to the BGH Capital camp claim that tax leakage linked to embarking on such a move means that it would not necessarily be the best outcome for the buyers or the company.

While Brookfield is casting its eye over Healthscope, one possibility is that the Canadian private equity firm has approached BGH Capital to become part of the consortium.

However, any mooted plan is unlikely to be well received by BGH Capital.

Its bid is currently fully funded and the understanding is that the management would rather go it alone after a less-than-easy experience partnering with another global buyout fund in owning the asset in the past.