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Morningstar | Healthscope Fair Value Increased to AUD 2.50 on Likelihood of Brookfield Acquisition Succeeding

We have increased our fair value estimate for Narrow-moat rated Healthscope to Brookfield’s Scheme of Arrangement offer price of AUD 2.50 per share, which we believe is highly likely to succeed. In addition to granting exclusive due diligence access, the Healthscope board has now recommended shareholders vote in favour of Brookfield’s offer and entered into an implementation agreement with the Private Equity firm. Brookfield’s decision to sell Healthscope’s real estate assets to NorthWest also increases the likelihood of the offer succeeding as it reduces funding requirements and increases the likelihood that Northwest, Healthscope’s third largest shareholder, will vote in favour of the offer. We continue to believe Brookfield’s Scheme of Arrangement offer is attractive as it exceeds our stand-alone fair value estimate of AUD 2.40 per share. However, the off-market takeover offer is below the current share price of AUD 2.45, meaning shareholders who do not want to wait for the Scheme of Arrangement process to conclude and do not expect a higher offer should sell on market. We will provide a formal recommendation on the Scheme of Arrangement following the release of the Explanatory Booklet, which is expected in April or May 2019. At the current market price of AUD 2.45, we believe Healthscope shares are fairly valued. Healthscope expects to hold the Scheme Meeting in May or June which is conveniently after AustralianSuper’s agreement with BGH ends. This is important as it enables AustralianSuper, Healthscope’s second largest shareholder, to vote in favour of the Scheme which requires the support of over 75% of Healthscope’s shareholders to become unconditional. This support may be required if BGH, which owns 19% of Healthscope, opposes the offer. Aside from acquisition news, Healthscope also provided an interim trading update which was broadly in-line with our forecasts, which we’ve maintained.

The latest Brookfield offer includes the AUD 0.035 per share interim dividend which means it is 3% below the previous AUD 2.585 offer made on 12 November 2018. In addition to the Scheme of Arrangement offer, Brookfield has also maintained its off-market takeover offer, which includes the AUD 0.035 per share interim dividend, but which has been reduced from AUD 2.455 to AUD 2.40. The off-market takeover offer will be triggered if the Scheme of Arrangement fails to exceed 75% support required to become compulsory but exceeds 50.1%.

The BGH consortium also reiterated its AUD 2.36 per share offer but this has a low chance of succeeding considering it is below the Brookfield offer. BGH said it would consider raising its offer if granted due diligence access but the Healthscope board has already denied this and we don’t expect it to be granted. Neither do we expect another higher offer to emerge considering the amount of time the process has been running.