Healthscope: A healthy deal

Latest reports put the likely value of a successful deal at around A$1.8 billion ($1.5 billion), with the still-anonymous bidders signaling – in contrast to some analysts’ speculations – that they have no intention of breaking the asset up. And Healthscope has now opened its books to the potential acquirers for due diligence, raising the chances of success.

ASX-listed Healthscope operates over 43 hospitals and 45 clinics across Australia, as well as a pathology business with branches in New Zealand, Singapore and Malaysia, and a diagnostic imaging arm across its own and other hospital chains. According to AVCJ sources, the business is reasonably well liked by sector analysts, with a stock price that has tended to underperform. The key deal driver, especially post the GFC, after almost two years of capital drought, is to grow the business by aggressive development out of the public markets, sources confirmed.

Sources described the bid as “full, fair and reasonable.” Healthscope certainly appears to have been broadly receptive to the private equity overtures. However, the group’s stock price has not reacted much to the successive news stories around the acquisition, suggesting that the markets see little likelihood of a competing bid, and little sense in gaming the situation to try to squeeze more out of the bidders. Blackstone reportedly considered a bid on its own, but instead chose to throw its financial backing into the consortium.

Competing strategic players, at least from within Australia, are unlikely to join in the auction, despite speculation that other approaches could detach parts of the Healthscope portfolio. Sonic Healthcare, Australia’s largest pathology group, recently downgraded its earnings, and could face anti-competition enquiries if it tried to pick up some or all of the business. Primary Health Care, also subject to a recent downgrade, is still digesting its own 2008 acquisition of Symbion Health.

Also, Australia’s private healthcare sector is widely regarded as very competitive, efficient, and lean-burn, with little excess to shave off a business – and little surplus value to be created by spinning parts out. In the circumstances, valuations from Merrill Lynch and UBS of up to a dollar per share higher than the current A$5.75 ($4.86) offer price, premised on a spin-off of the pathology business, have been greeted with widespread skepticism.

Out of the public markets, and supported by well-financed private equity owners, Healthscope could concentrate on growth through investing in brownfield and greenfield sites. TPG Capital especially has recently boosted its reputation as a value-adding healthcare investor through its participation in Singapore’s Parkway Holdings, which it recently exited to India’s Fortis Healthcare for $685.3 million.

However, no matter how friendly the board and receptive markets, there is still room for a misstep before the deal closes. TPG Capital’s last-minute failure to clinch the privatization of Qantas in 2007, in the face of aggressive chicken games by hedge funds, springs to mind – and will spring to many more minds as any Healthscope deal approaches the 75% threshold for a friendly takeover in Australia.

Goldman Sachs JBWere and Lazard are advising Healthscope, with Minter Ellison acting as legal advisor. UBS is advising Blackstone.

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• Topics
• Australasia
• Healthcare
• Buyouts
• The Blackstone Group
• TPG Capital
• The Carlyle Group