Christopher Niche: US private equity giant has offered $ 20 billion to take over Australian company Ramsay Health Care

opinion:

Private investors and stock market investors are very different beasts.

While stock buyers want an instant return – or at least one in the next few months – private equity is patient,
investment over the years.

Nowhere is this more evident than in the application of the American private capital giant Kohlberg Kravis Roberts & Co to the owner of the Australian hospital and operator Ramsay Health Care.

Last week, KKR put forward a $ 20 billion takeover bid to Ramsey, valuing the company at about 10 times EBITDA or operating profit. The stock market, by contrast, values ​​the company about seven times EBITDA.

KKR’s bid was about 40 percent higher than Ramsay’s stock price last Tuesday, a day before the offer was announced in the market. This is what shareholders will look for when weighing KKR’s offer, and many will accept the offer if a higher bid does not appear.

KKR and its investment partners, including Australian pension funds, look much further.

Ramsay has grown impressively since its founding in 1964 by attorney Paul Ramsay, a developer, when he bought a guest house on the North Shore of Sydney and turned it into a 16-bed psychiatric hospital.

The company operates 72 private hospitals in Australia and several pharmacies. In recent years, it has also expanded overseas and is now one of the world’s largest private healthcare operators with 460 facilities in 10 countries, including the UK and France. It employs more than 80,000 people and treats eight million patients a year.

But after the publication of double-digit income growth due to Australian governments increasing their reliance on private health insurance and the private health care system to meet the country’s health needs, Ramsay’s profits came under pressure.

First, governments began to tighten the screws on private health insurance tax breaks, which hurt Ramsey because as a private hospital operator he relied on insurance payments to help his patents afford a procedure at one of their hospitals.

Then came Covid, governments around the world taking long pauses on planned operations, bread with Ramsey butter.

All of this led to the company’s stock price falling from just under $ 80 before the pandemic to about $ 65 before the bid was made. Not surprisingly, stock market investors are sympathetic to KKR’s offer of $ 88 per share plus tax credits of about $ 3.60 per share.

KKR is not concerned about the drop in revenue caused by Covid, or the long-term effects of increased public support for private health care. In fact, less than a third of his income and revenue comes from Australia. Europe is now its largest market.

A private investment investor takes into account the long-term trend of an aging population and older people who want a fuller and more active life than their parents and grandparents. This means much more planned surgeries such as knee and hip replacement.

In addition, governments around the world are struggling to meet the demand for health care, leaving more and more to the private sector. Consumers in the western world spend more and more of their income on health care.

Ramsey’s earnings may decline this year and may remain suppressed for several more years. The company may even suffer another crisis that none of us can yet imagine.

But long-term trends will continue no matter, and the company will eventually recover its revenue and resume its double-digit growth. KKR has abundant patient capital and should not show an increase in its investments every quarter or every year in the same way as stock portfolio managers often do.

Ramsey owns the land on which his hospitals are located, and health analysts say his first step will be the sale and lease of hospital facilities, which will receive between 7.5 billion to 8.5 billion Australian dollars in cash. This will reduce the cost of their investment in a core healthcare business.

The Ramsay Health Council has opened its accounting offices for due diligence, believing that this will provide an opportunity to listen well to KKR’s application. And the Ramsey Foundation, a charity founded by Paul Ramsey, said it would support the offer by selling 20 percent of the company it owns.

Now that Ramsey is on the market, other bidders are likely to appear, and bid prices could be much higher.

In fact, KKR is just the latest private investor to pull companies out of the Australian stock market, feeling long-term value, and shareholders want instant profits. In February, Brookfield Asset Management bought the owner of the Victorian AusNet grid for A $ 18 billion, and another consortium took over Sydney Airport in February for A $ 23.6 billion.

Like KKR, they were attracted by the long-term business prospects and stable profits.

If successful, KKR’s offer will be Australia’s largest private equity buyout.

Either way, it’s definitely not the last.