Morningstar | HSO Updated Star Rating from 13 Nov 2018
We recommend shareholders in narrow-moat rated Healthscope do nothing following Brookfield’s new indicative and conditional takeover offer for the company. Brookfield plans to offer Healthscope shareholders AUD 2.55 per share under a Scheme of Arrangement with the option to receive proceeds in either cash or shares in a new unlisted entity that will own Healthscope. In addition, Healthscope shareholders would receive the AUD 3.5 cent unfranked interim dividend, which lifts the total value of the offer to AUD 2.585 per share. This is 10% above the AUD 2.36 all cash BGH indicative offer and 8% above our AUD 2.40 stand-alone fair value estimate, rendering the offer attractive. However, like the BGH offer, the Brookfield offer is indicative and conditional upon a satisfactory outcome on due diligence, among other things, meaning Healthscope shareholders don’t yet have a firm offer to accept or reject.Brookfield doesn’t intend to hold its Scheme meeting before 1 April 2019, after AustralianSuper’s exclusive agreement with BGH ends, which will enable AustralianSuper to vote for its offer. This is important as the Scheme will require the support of over 75% of Healthscope’s shareholders to become unconditional. However, if the Scheme is rejected by Healthscope shareholders, Brookfield intends to offer AUD 2.42 cash per Healthscope share, or AUD 2.455 including the interim dividend, conditional upon receiving 50.1% acceptances. If this hurdle is achieved, it’s possible that Healthscope will remain as a listed entity. At the current market price of AUD 2.37, we believe Healthscope shares are fairly valued.
The recent BGH and Brookfield offers have helped increase the Healthscope share price by over 30% during the past three weeks. We think there’s little risk that the bids will disappear and the share price fall as occurred earlier in the year. This time, Brookfield has been granted exclusive due diligence following shareholder pressure on the board to engage with bidders. Although BGH has not been granted access to undertake due diligence, it’s possible that the private equity firm will increase its bid in an attempt to change the board’s mind. It’s also possible that other bids may emerge now that Healthscope is very much "in play," and we expect at least one bid to progress to a formal offer.
Healthscope is a private healthcare provider, with 45 private hospitals and 48 medical centres and skin clinics across Australia, as well as 56 international pathology laboratories. Co. is also a provider of pathology services in New Zealand, Singapore and Malaysia. Co.'s reportable segments are Hospitals Australia, which provides management and surgical and non-surgical private hospitals; Pathology New Zealand, which provides pathology services in New Zealand; and Other, which provides pathology services in Malaysia, Singapore and Vietnam and practice management services in medical centres in Australia.
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