Ramsay Healthcare has received a non-binding, indicative proposal from a consortium led by KKR to acquire the business. The bid is welltimed as RHC is facing a huge few years of post-COVID backlog care that will drive earnings and margin higher. 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.
The last two years of COVID has created a 20%-plus deficit of care across most healthcare systems. The backlog will take at least as long to unwind and importantly, public healthcare systems will need the assistance of private hospitals to achieve it.
But COVID-19 has not completely disappeared and even a modest level on on-going prevalence represents a year-round care load similar in quantum to a permanent flu season.
RHC is one a just a few global providers that stands to benefit from this backlog of care and this scarcity value will drive higher pricing.
The $88 per share offer is the headline number in this proposal. The actual cash offer to shareholders would exclude any ordinary or special dividends paid to shareholders. This includes the $0.485 interim dividend paid on 31 March 2022. It will also include a special dividend to use up approximately $752 million of franking credits. The underlying ‘cash’ offer could therefore be around $80 per share.
One aspect that is overlooked in RHC is the value of its property portfolio. In FY21, the book value of land and buildings was approximately $3.85 billion, but the property portfolio value is likely to be closer to $8 billion. A sale and leaseback could release around $4 billion of value.
RHC’s Board has not made any recommendation on KKR’s proposal and has granted it permission to conduct due diligence on a nonexclusive basis.
RHC’s major shareholder, the Ramsay Foundation (20%), is supportive of the talks.
Investment view
KKR’s bid represents a PE ratio of about 28x next year’s earnings per share which is in-line with historic PE ratios. In our view, this does not adequately value the near term earnings surge from the catch-up on surgery backlog caused by COVID-19 disruption.
Neither does it reflect the scarcity value of private hospital capacity that will take up an increasing role in the provision of healthcare relative to public sector.
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.
Recommendation
We have retained our Buy recommendation.
