KKR pulls pin on bid for Ramsay Health Care

It was a letter from KKR to Ramsay Health Care chairman Michael Siddle on Monday night that finally, probably, killed the one of the biggest takeovers of the year.

Ramsay Health Care said it hadn’t yet had time to fully consider the KKR-led consortium’s correspondence, which eluded to it being open to further discussions..

More than $1.5bn was wiped from the value of Ramsay Health Care after KKR all but pulled its $20bn takeover bid for the hospital operator.

It was a one and half page letter from the private equity firm to Ramsay chairman Michael Siddle late on Monday that finally, probably, killed one of the biggest takeovers in the world for 2022.

The letter, disclosed to the Australian Securities Exchange on Tuesday, sent Ramsay shares down 10 per cent – or $7.04, to $63.17 – as investors considered the likelihood of another bid and whether the company can hang onto margins in a rapidly-rising cost environment.

The country’s biggest private hospital operator has the double whammy of an undersupply of nurses – pushing wages up – and grappling with private health insurers trying to lock in three-year contracts with the hospitals with only 1 to 1.5 per cent increase to indexation when costs are rising at 3 to 4 per cent per year.

The hospital operator is also grappling with Covid-19 outbreaks in the community, which continues to cause surgery cancellations due to doctors and nurses being off sick and patients needing four to eight weeks recovery time post infection.

Ramsay Health Care chairman Michael Siddle received the letter from KKR late on Monday night. Picture: David Moir

While investors in Ramsay may be licking their wounds, the collapse of the deal also represents a massive loss to the investment bankers involved.

KKR’s adviser Credit Suisse and Barrenjoey Capital would have likely earned $25m in fees between them based on a range of 15 to 20 basis points – with the lion’s share likely to have been destined for Credit Suisse on the financing side, noting that KRR is notoriously tight with fees.

On the other side, UBS and Goldman Sachs could have earned as much as $30m between them if the deal had proceeded, based on the unspoken theory on the defence side that it’s the buyer who ultimately pays.

In its statement, Ramsay said it hadn’t yet had time to fully consider the KKR-led consortium’s correspondence, which suggested it was open to further discussions.

“Whilst the consortium recognises that further engagement and access to further due diligence may provide some positive visibility, the information provided in the FY22 results implies that there is meaningful downward pressure on the valuation proposed under the Alternative Proposal,” Ramsay head of investor relations, Kelly Hibbins, said.

“The correspondence also stated that should the Ramsay Board be willing to reset valuation expectations and consider a new proposal, the Consortium would move quickly to discuss mutually acceptable terms,” Ms Hibbins said.

One source involved in discussions, speaking on condition of anonymity on Tuesday, said the letter “certainly left the door open” and even parties acting for KKR were not absolute in their view the consortium wouldn’t come back to the table.

The Covid-19 pandemic has weighed on healthcare operators including Ramsay, with the shutdown of non-urgent surgeries, staffing shortages due to isolation regulations, and upward wage pressure weighing on earnings.

Ramsay operates hospitals and clinics across 10 countries in three continents, with a network of more than 530 locations. It has 72 private hospitals and day surgery units in Australia and operates clinics and primary care units in about 350 locations across six countries in Europe.

Ramsay said in August that $264m had been wiped off its earnings in the year to June 30 as a direct result of pandemic restrictions and related costs, such as personal protective equipment.

Ramsay’s overall net profit dived 37.6 per cent to $274m, while revenue firmed 4.6 per cent to $13.7bn.

The company warned at the time that earnings would not likely recover until 2024 and that it would be seeking better funding terms from health insurers. It followed a highly publicised funding dispute with Australia’s second biggest health insurer Bupa, which has since been resolved.

KKR lobbed an unconditional bid for Ramsay in April and then withdrew an $88 a share cash bid last month. It came back with a lower proposal with a non-cash component that was described by Ramsay as “meaningfully inferior”. Due diligence dragged on longer than is usual for a takeover in part because of lack of access to Ramsay’s publicly traded French arm, Ramsay Sante. KKR owns Ramsay Sante competitor Elsan, which drove the company’s second biggest shareholder Predica to block moves to provide KKR detailed financial information.

When KKR first pulled their unconditional offer they remained in talks to offer a mixture of cash and scrip with existing Ramsay investors keeping the shares in Ramsay Sante, considered by many to be someone of a poison pill for any takeover.