Given Ramsay Healthcare’s (ASX: RHC) disastrous $1.5 billion acquisition of Britain's Elysium Healthcare in 2023, the market has every right to be wary about growing speculation that Australia's biggest private hospital operator could be eyeballing the acquisition of ailing number two private hospital operator, Healthscope.
The private equity arm of Canadian investment giant Brookfield - which acquired Healthscope in 2019, has with the approval of lenders – who collectively owe $1.6 billion - appointed Moelis’ bankers to shop the operation for potential buyers over the next month.
However, given the sorry state of its balance sheet, it remains to be seen how many prospective bidders have got deep enough pockets to contemplate taking over the debt-riddled Healthscope.
Beyond Healthscope, the third largest player by number of hospitals is Pacific Equity Partners-owned Healthe Care, which is only half Healthscope’s size.
Big debt, too few assets
While the scale of Healthscope’s operation – with 642,000 patient admissions in 38 hospitals annually – looks compelling, the state of the company’s finances doesn't bode well for a strong sale process.
As Azzet reported last month, the private hospital operator brought in insolvency experts KordaMentha to help keep the lights on and restructure the business.
Healthscope’s sizable debt is exacerbated by its lack of hard assets that could potentially be offloaded to generate working capital.
Added to the company’s woes, it recently received breach notices for 11 of its 38 hospitals after failing to pay rent to its landlord, HealthCo Healthcare & Wellness REIT - an investment vehicle run by David Di Pilla’s ASX-listed HMC Capital (ASX: HMC).
Could HMC Capital be a serious bidder?
While Ramsay has hired Goldman Sachs to monitor Healthscope, Di Pilla has also publicly expressed interest in acquiring Healthscope’s operations.
Meanwhile, Di Pilla is under no illusions about the sorry state of the funding model for private hospitals in Australia - which he says is broken.
“The transmission mechanism from taxpayers paying private health insurers an amount of premium and the transmission mechanism for that money to end up in the hands of operators and ultimately into better services for patients is broken and needs to be fixed,” Di Pilla said.
Given that Healthscope has been a financial disaster for Brookfield – with the hospital operator’s debt trading at only 40 cents in the dollar – getting a deal over the line may be more significant than who it sells it to.
Nevertheless, the private equity giant – which retains control of the ownership transfer - may favour a deal with a seasoned industry operator like Ramsay rather than offloading it to yet another financial engineer, like Di Pilla's HMC Capital.
Fire sale for its parts
Assuming Ramsay doesn't bid for Healthscope in its entirety, the private hospital operator is likely to end up in administration, offloaded by its lenders or recapitalised by distressed debt investors.
The outcome will be the same, either way: a fire sale of various parts, perhaps along state lines, in the future.
This may be one way Ramsay could pick off the jewels in Healthscope’s operation, leave the rest.
Based on Macquarie research, Ramsay would favour Healthscope's 24 mainstream comprehensive facilities over its mental health, rehabilitation or day surgery sites.
Other hurdles
What the regulator, the ACCC, may frown at is the 20-plus minute drive between an existing Ramsay site and 17 of these 24 Healthscope facilities.
Added another layer of complexity, 17 sites are split across Healthscope’s landlords who have rights to replace Healthscope with other operators by default.
Meanwhile, Brookfield has until 18 May to find a buyer or restructuring plan.
Given that Ramsay’s share price is down 37% over one year, shareholders won't see a major premium ascribed to any future bid.
Ramsay’s market cap is $7.4 billion making it an ASX100 stock.
The stock appears weak with little demand.
Consensus is Hold.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
