Will KKR produce an alternate alternative bid for Ramsay Health Care?
In the meantime, RHC’s FY22 result fell below market expectations thanks to COVID-19 but the commentary proposes a glimpse of recovery. Reported group EBIT fell 21% in FY22 but adjusting this for non-recurring items and COVID suggests adjusted EBIT was ~51% higher at around $1.33 billion with a respectable 10% margin.
Investment view
In their only studio album from 1977, “Never Mind the Bollocks, Here’s the Sex Pistols”, the title evocatively suggests the alternative is worth your attention. KKR’s alternative bid may or may not be worthy of consideration, but RHC has already consigned it to the reject bin labelling it ‘meaningfully inferior’.
That does not mean that RHC is rejecting KKR’s overtures, quite the contrary. The KKR consortium said it no longer needs due diligence on the French business, but that the alternative bid is its only bid. The original bid was withdrawn.
RHC want to keep working with KKR to find a solution and it is thought that other options are being created including a sale of RHS’s GdS (Ramsay Santé) stake.
For the record, KKR’s alternative bid was $88 per share comprising $78.20 cash plus GdS scrip. The original bid was an indicative $88 per share, less dividends paid or declared after 31 January 2022.
RHC’s Board said the alternative bid was ‘meaningfully inferior’ to the original. But the RHC Board is looking for a way to get the KKR consortium to put forward an improved binding proposal.
So, it’s a stalemate at the moment with the clock ticking on KKR’s side of the chess board.
If no further bid is forthcoming from KKR, shareholders will likely see the share price reset based on the near term earnings weakness.
The longer term prognosis for RHC’s earnings is contrastingly positive given the huge backlog of healthcare created by the interruption of COVID-19. We estimate a 20%-plus deficit of care across most healthcare systems and the catch-up may take years. Overwhelmed Public Hospital systems will need the assistance of private hospitals to fix it.
RHC’s high quality global hospital assets are scarce and are perfectly positioned to capitalise on the increasing industry dependency on private delivery of care.
Worth noting is the significant property value attached to RHC. In FY22 the book value of its land and buildings was approximately $3.2 billion whereas the market value of the property portfolio is likely to be more like $8 billion. A sale and leaseback could release around $4 billion of value.
Risks to investment view
Any changes to regulatory and payer settings (Private Health Insurance) and prosthesis cuts would impact earnings. A slower restart to elective surgery would affect the rate of earnings recovery. Any resurgence of COVID would be a negative event. The status of KKR’s takeover bid is unclear. If no updated bid is forthcoming, the share price may fall.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: FY22 RESULT
