Ramsay shuts door on KKR bid, will go harder on health insurer negotiations as profit dives 38pc

The private hospital group has rebuffed its suitor, while revealing it will seek better terms from its payers after the pandemic wiped $264m off earnings.

Ramsay Health Care doesn’t expect its earnings to recover until 2024.

US private equity major Kohlberg Kravis Roberts has withdrawn a $20bn-plus all cash offer for Ramsay Health Care after it failed to gain access to the books of the company’s French arm.

The deal, priced at $88 a share, is now in tatters after KKR was unable to complete due diligence on Ramsay’s 52.8 per cent-owned French business, Ramsay Sante.

As a result it scrapped its bid and is pursuing a cheaper cash and scrip alternative, valued at $84.93 a share, enraging Ramsay’s board, which has refused to engage further with the KKR-led consortium that also includes the nurse super fund Hesta.

The decision came as Ramsay’s annual profit crumbled almost 38 per cent, as it battled the fallout of pandemic-fuelled elective surgery restrictions and fresh waves of Covid-19. Chief executive Craig McNally says the company is now seeking better funding terms from health insurers and isn’t afraid to terminate an agreement if he believes it’s “not sustainable for Ramsay”.

The cheaper buyout option, KKR now favours, involves paying shareholders $78.20 cash a share and about 0.22 Ramsay Sante shares, which were trading at €21.20 ($30.36) on Thursday.

“The Ramsay board has considered the alternative proposal and is unanimously of the view that it is meaningfully inferior to the consortium’s indicative proposal of $88.00 cash per share,” the company’s directors said in a statement.

“In forming this view, the Ramsay board had regard to both the lower implied value relative to the all cash proposal, as well as structural challenges, execution complexity and the low liquidity of Ramsay Sante shares. The Ramsay board determined not to engage further with the consortium in relation to the alternative proposal on these terms.”

It is understood that KKR relied on Ramsay to grant it access to Ramsay Sante, rather than directly approach the French company’s board, which had the sole authority to grant due diligence.

Ramsay Sante attempted to engage with KRR, sending it a list of questions about its intentions for the company. But KKR did not provide responses to these questions.

Complicating matters further is the fact KKR owns Ramsay Sante competitor Elsan, making Ramsay’s French arm reluctant to open its books to the New York-based private equity titan, known as one of the original ‘‘barbarians at the gate’’ over its leveraged buyout of US tobacco and food company RJR Nabisco in 1988.

Ramsay’s majority stake in Ramsay Sante – valued at €1.24bn – has created a defence mechanism to ward off takeover suitors, given its complexities, which also include French regulatory approval.

As late as Thursday evening, Ramsay’s board was still willing to engage with KKR on its initial all cash $88 a share proposal. But during a call with analysts on Friday morning, Mr McNally dramatically revealed the company had received a letter from KKR, advising it was withdrawing the all cash offer, sparking a trading halt of Ramsay’s shares on the ASX.

Mr McNally said he was not taking any questions on the takeover. He was expected to come under pressure from investors during the call after the company had provided no updates since revealing KKR’s initial bid in April.

After emerging from a trading halt on Friday afternoon, Ramsay’s shares slumped 3.2 per cent to $70.62, extending its losses to 16.3 per cent since April.

The company revealed on Friday 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.

Mr McNally said he did not expect earnings to recover until 2024 and would seeking better funding terms from health insurers. It comes after a bitter funding dispute with Australia’s second biggest health insurer Bupa.

Ramsay was seeking to split the difference between a 7 per cent surge in hospital costs, while Bupa initially offered a funding increase of about 1.5 per cent. The pair finally reached middle ground two weeks ago, preventing Bupa customers from paying hundreds of dollars in out-of-pocket fees on admission to a Ramsay hospital.

“There absolutely needs to be a recognition of the changing circumstances because it’s not just a one off,” Mr McNally said about the hospital cost increases.

“And as we were prepared to do in the Bupa position, if we do not thing that an agreement is sustainable from a Ramsay Health Care point of view, we are better off not to have that agreement. We were absolutely prepared not to have an agreement with Bupa, so it wasn’t a negotiation tactic.”

NIB is the next major insurer which has a contract up for renewal, with Ramsay’s deal with Medibank set for renegotiation later next year.

“Given inflationary and Covid related pressures on costs Ramsay will focus on negotiating improved terms with payers to reflect this – both health funds and governments – leveraging the group’s global scale in procurements and driving efficiency and productivity improvements where the operating environment allows,” Mr McNally said.

“Ramsay believes the outlook for the group remains strong. Our world class hospital network combined with our outstanding people and clinicians give us confidence that the business is well placed to take advantage of the positive long term dynamics driving the healthcare industry. We expect a gradual recovery through FY23 and more normalised conditions from FY24 onwards.”

Revenue across Ramsay’s Asia Pacific operations, which include Australia, fell 1.8 per cent to $5.33bn. Earnings before interest and tax meanwhile tumbled 26.5 per cent to $467.3m.

Across its UK division, revenue almost doubled to $1.2bn, with its acquisition of Elysium contributing $284.3m. But the UK business sank to a $26.2m loss, a $128.2m turnaround on the previous year, and included Elysium transaction costs of $26.2m.

“Ramsay reverted to its pre-Covid commercial arrangements with the National Health Service England (NHSE) for most of the period where it is paid for services provided.

It entered into a volume based agreement for the period January 10 to March 31 2022, which made its services available to the NHSE to meet the ongoing demands resulting from the Covid pandemic. During this period Ramsay was able to continue to provide private patient activity.”

European revenue, which includes Ramsay Sante, leapt 7 per cent to $6.66bn, while EBIT jumped 15.9 per cent to $450.2m.

“Ramsay Sante continued its commitment to take care of Covid patients in Europe with more than 10,000 Covid cases treated in France and 2,000 in Sweden.

“ It has continued to support governments to manage the pandemic through both Covid testing and vaccination efforts. The French business operated under revenue guarantee arrangements with the French government for the 12 month period.

“The business reported growth in activity levels over the 12 month period heavily weighted to day procedures and out of hospital activity in its primary and speciality care businesses in the Nordics region.”