Virtus Health confirmed it has received a bid from new shareholder, BGH Capital valuing the equity of the company at $607 million. The Board is currently considering the approach and has yet to make a recommendation.
BGH Capital has only recently become a shareholder in VRT by acquiring a 9.99% stake at $7.10 per share this week. It has also entered into a deal for a further 8.6 million shares (10%) that is subject to government approval.
BGH Capital’s bid for VRT is an unsolicited, non-binding indication of interest for all the remaining shares in the company and would be paid in cash. BGH said it would provide a cash and scrip alternative to VRT’s major fertility specialist shareholders as a retention incentive.
The bid price represents an FY22f EV/EBITDA multiple of 9.5x (including lease liabilities) and a PE ratio of 17x consensus forecasts. This is a clear premium to where VRT has recently been trading, but it is unambiguously below comparable international transaction multiples that have ranged between 11-12x.
To refresh, VRT has one of the largest and most diversified IVF portfolios in the world spanning 5 countries, 44 clinics, 128 doctors (fertility specialists) and around 24k fresh cycles annually. This places VRT in the top 5 of global IVF franchises.
A new management team at VRT has refreshed the strategy investing in clinic expansion, a genetics strategy and Precision Fertility.
VRT is facing a slowing cycle of demand for fertility treatment, some higher costs and uncertainty over pending ACCC approval of its Adora Fertility acquisition.
Investment view
VRT delivered a solid trading update at its recent annual meeting showing Australian fresh cycle growth of 3.5% year-on-year (weighted to premium services) and steady levels of fresh cycles in the international businesses. Diagnostics revenue has increased 10.4% year-on-year and revenue at the Day Hospitals is flat. Group revenue is up 1.5% in 1Q22 compared to last year. Management is flagging a rising cost base as investments (capex and opex) increase and some one-off costs associated with Adora Fertility.
The Adora-ACCC outcome remains a risk for VRT, along with the general level of demand for fertility treatment.
We have eased our recommendation to a Hold to reflect the BGH Capital bid, but shareholders can afford to wait for the Board’s pronouncement before taking any action. The bid has perhaps brought forward some of the expected gains from management’s strategy, so we think a wait and see approach is acceptable for now.
