Private equity investors and share market investors are very different beasts.
Whereas buyers of stocks want an instant return – or at least one in the next few months – private capital is patient, making an investment with a timeframe of years.
Nowhere is this more evident in than in US private equity giant Kohlberg Kravis Roberts & Co’s bid for Australian hospital owner and operator Ramsay Health Care.
KKR last week lobbed a A$20 billion takeover offer for Ramsay, valuing the company at about 10 times EBITDA, or operating earnings. The share market, by contrast, values the company at about seven times EBITDA.
The KKR bid is about 40 per cent higher than the Ramsay share price last Tuesday, the day before the bid was announced to the market. This is what shareholders will have their eye on when they weigh up the KKR bid and many will accept the offer if a higher bid doesn’t emerge.
KKR and its investment partners, including Australian superannuation funds, are looking much further ahead.
Ramsay has grown spectacularly since it was founded in 1964 by lawyer turned property developer Paul Ramsay, when he bought a guest house on Sydney’s North Shore and turned it into a 16-bed psychiatric hospital.
The company operates 72 private hospitals in Australia and a few pharmacies. In recent years it has also expanded overseas and is now one of the world’s largest private healthcare operators, with 460 facilities across 10 countries including the UK and France. It employs more than 80,000 people and its facilities treat eight million patients a year.
But after posting double-digit profit growth on the back of successive Australian governments increasing reliance on private health insurance and the private health system to meet the nation’s healthcare needs, Ramsay’s profits came under pressure.
First, governments started to tighten the screws on private health insurance tax concessions, which hurt Ramsay because as a private hospital operator it relied on insurance payouts to help its patents afford a procedure at one of its hospitals.
Then along came Covid, with governments around the world placing long pauses on elective surgeries, Ramsay’s bread and butter.
All this saw the company’s share price drop from a little under $80 before the pandemic to about $65 before the bid was made. It’s little wonder that share market investors are looking favourably on KKR’s $88-a-share offer, plus about $3.60 worth of tax credits a share.
KKR isn’t bothered by the Covid-induced earnings dip or by the lingering effects of the tightening of government support for private healthcare. In fact, less than a third of its revenue and earnings come from Australia. Europe is now its biggest market.
The private equity investor has its eye on the long-term trend of aging populations and older people who want fuller, more active lives than their parents and grandparents. This means a lot more elective surgery such as knee and hip replacements.
On top of this, governments around the world are struggling to meet demand for healthcare, leaving more and more to the private sector. Consumers in the Western world are spending ever-increasing proportions of their income on healthcare.
Ramsay’s earnings might dip this year and might remain suppressed for a few more years. The company might even be hit by another crisis which none of us can yet imagine.
But the longer-term trends will continue regardless and the company will eventually recover its earnings and resume its double-digit growth. KKR has a wealth of patient capital and doesn’t have to show an increase in its investments every quarter or every year in the same way that managers of share portfolios often do.
Ramsay owns the land its hospitals are on and healthcare analysts say its first move will be to sell and leaseback the hospital sites, generating between A$7.5 billion and A$8.5 billion in cash. This will slash the cost of their investment in the core healthcare business.
The Ramsay Health Care board has opened its books to due diligence, suggesting it will give KKR’s bid a good hearing. And the Ramsay Foundation, the charity founded by Paul Ramsay, has said it will support the offer by selling the 20 per cent of the company it owns.
Now that Ramsay is on the market, other bidders are likely to emerge and the offer prices could go a lot higher.
In fact, KKR is just the latest private investor to take companies off the Australian share market, perceiving long-term value while stockholders want instant gains. Brookfield Asset Management bought Victorian power grid owner AusNet for A$18 billion and another consortium took over Sydney Airport for A$23.6 billion in February.
Like KKR, they were attracted to the businesses’ long-term outlook and stable earnings.
If it’s successful, the KKR bid would be Australia’s largest ever private equity buyout.
Either way, it is certain not to be the last.
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