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Morningstar | Healthscope More Likely to Be Acquired This Time Following BGH Consortium Return

We think narrow-moat-rated Healthscope has a strong chance of being acquired following its second takeover bid from the BGH-Australian Super consortium in the space of six months. BGH has maintained its indicative offer price at AUD 2.36 cash per share and the offer has an even longer list of conditions this time. However, considering the share price collapsed by 30% following the board’s decision to deny due diligence access in May, we expect shareholders will pressure the board to co-operate this time, and the annual general meeting next week provides the perfect opportunity.

We expect this is just the begging of a protracted tussle, and potential bidding war, for Healthscope, considering the previous BGH bid flushed out a rival bid from Brookfield at AUD 2.50 cash per share. On this occasion, BGH claims to have the support of Ellerston Capital, who own around 9% of the shares, although Ellerston will consider higher offers if they emerge. Australian Super, who own around 14% of the company is reportedly prevented from supporting alternative offers, although a Scheme of Arrangement only requires the support of 75% of the shares to become compulsory and a sufficiently high alternative offer may justify reneging on any agreement that’s been made.

We maintain our fair value estimate at AUD 2.40 per share which implies the BGH bid is fair. We continue to believe the company’s long-term outlook is good but market remains preoccupied with the weak medium-term outlook for private health insurance, or PHI, participation rates and the Australian Labor Party’s plans for PHI premiums. To management’s credit, a strategic review was undertaken following the previous bids, with the Asian Pathology business sold and two hospitals closed. However, with the market continuing to undervalue the shares, a takeover may be the easiest route to realising Healthscope’s intrinsic value.