Hot and cold with Healius, and healthcare stocks
Plenty of raised eyebrows after investment banks came knocking for work – despite no takeover bid. Does the heat in the sector mean KKR’s deal for Ramsay is safe from market travails?
Senior figures at Healius – once Primary Health Care – were left bemused in recent weeks after being approached by several investment banks, including UBS, to discuss their interest in engaging them for a defence mandate.
After all, the company had not been the target of a takeover offer since Jangho Group failed in its $2bn takeover bid in 2019, and another from private equiteers Partners Group the next year.
EQT is another global player that could have an interest now.
The healthcare sector is undeniably hot at the moment – despite the carnage on global sharemarkets. Many have profited from the pandemic, through the increased need for diagnostic tools, respirators and the like.
It has led to a stream of deals, with 20 so far this year, mostly driven by private capital.
The biggest is the KKR-led consortium’s $20bn bid for Ramsay Health, a transaction facing increased difficulty. The cost of financing is shooting up as interest rates rise, and as volatile markets narrow the path to an easy potential exit of Ramsay’s real estate and Europe hospitals businesses. The consortium has yet to gain access to the books of Ramsay Sante, the joint-venture French hospitals business, because 40 per cent shareholder Predica is uncomfortable showing a competitor – KKR – detailed information.
In any case the books may not be particularly attractive. In general, European private hospital businesses have been struggling during the pandemic due to a downturn in elective surgeries.
KKR is a direct competitor to Ramsay Sante, so the deal would also require competition approval and foreign investment approvals in several countries.
As time ticks by, the cost of money is continuing to rise, with the US Federal Reserve on Wednesday announcing the biggest interest rate rise since 1994 in a bid to slow inflation.
KRR has Bank of America, Credit Suisse, Barclays and Deutsche Bank looking at financing, but the banks’ pricing would need to be reopened 60-90 days from the initial agreement.
And the only way is up.
While Ramsay itself is a target, it is also on the hunt and one of several firms to have shown interest in Healius’s day hospitals unit.
Healius chief executive Malcolm Parmenter would not comment on the sales process except to say that it was early days and Healius had not even completed an information memorandum for the business yet.
Other parties to have shown interest include Healthscope, Cura Day, Medibank and private equity firms like Crescent Capital.
Gresham is working on the sale of the Healius day surgery business, which produced $8.4m of earnings before interest, tax, depreciation and amortisation in the six months to December, down 19 per cent on the previous corresponding period. Valuations for the business vary widely from $200m-$400m because it is difficult to define what price one competitor will pay to stop another from picking it up – Ramsay and Medibank in particular.
Ramsay and Medibank are keen on the day hospital business because 70 per cent of procedures being done in long-stay facilities – for example Ramsay’s North Shore Private Hospital – could actually be done in short-stay.
It is a trend that is growing strongly in the US, where it is called Ambulatory Care, and Ramsay would want to have that market covered. Medibank, on the other hand, would have to pay significantly less for inpatient care if it was done in a vertically operated short-stay facility.
The talk swirling around Healius is in part because of the heat in the sector and also in part because of its declared desire to get out of businesses where it does not have a strategic advantage, such as day hospitals, and grow in areas where it is already a serious contender, such as the pathology and diagnostic imaging.
However, Dr Parmenter said his firm was definitely not a buyer of competitor Integral Diagnostics. “We want to grow in this space but are looking for smaller bolt-on acquisitions,” he said.
The Healius share price doesn’t suggest a creep is on, having dropped 29 per cent this year and closing at $3.70 on Thursday.
While talk of capital market activity is surely keeping bankers and chief financial officers busy, Healius is quite rightly looking at how to organically grow its pathology business, particularly its PCR testing operations.
The company’s senior executive team is due to meet with new Health Minister Mark Butler in coming weeks and has been negotiating with the new government on what should be the approach to Covid-19 testing.
Dr Parmenter said the national policy on testing needed to change because new research from the Centres for Disease Control and Prevention has found among a highly vaccinated population that rapid antigen tests have only a 50 per cent sensitivity, which peaks at the four day mark of being infectious.
“This means that RATs are often not working, and often by the time they do work, a person may be four days into their illness, and then be required to self isolate beyond when they are actually infectious,” Dr Parmenter said.
Dr Parmenter believes government policy should be changed to make PCR testing the key diagnostic tool, rather than RATs, in order to reduce the number of deaths from Covid-19.
Healius’s half-year profits triple in the period to December 30 due to booming demand for its PCR testing business during the pandemic, so it is understandable that its chief executive, a former GP himself, would be concerned about the current situation with Covid-19 in this country.
There has been 5687 deaths from Covid-19 since January 1, dramatically higher than the 1255 people who died from the flu over a 12-month period during the country’s worst outbreak 2017.
While there is no doubt testing procedures could do with a rethink as rates rise during winter, it’s unclear whether the new government will want to go back to a scenario that would see car lines snaking around testing centres.
harcourtt@theaustralian.com.au
