A high-profile fight for Abu Dhabi-based hospitals operator Al Noor (ANH) between rivals NMC Health (NMC) and South African group Mediclinic is all the more interesting because the major shareholder in Mediclinic, Remgro, bought a 30 per cent stake in London-listed Spire Healthcare (SPI) in June. To us, Remgro wants to make Mediclinic's intent clear: to expand the business outside South Africa, consolidate its position in Switzerland and take market share across the fast-growing Middle East. The UK private healthcare sector is also firmly in recovery following the collapse of Southern Cross in 2004. A successful merger with Al Noor would hand Mediclinic a London-market listing, making it feasible for Mediclinic to take over Spire altogether to solidify its UK base. That makes Spire a prime takeover target for investors to add to their portfolio.
- Influence of major shareholder
- Likely takeover target
- New hospital build programme
- Spending constraints on NHS
- Effect of penalty-free NHS waiting lists
- Financing needs to be closely watched
Spire didn't announce the brightest set of first-half results in August. Total NHS sales increased 14 per cent during the half, but the removal of penalties for long NHS waiting lists and the Conservative victory in May's General Election led to earnings downgrades for the following financial year. This shifted the share price into reverse, but that may offer an opportunity to buy a stock that has mostly traded on a high rating since its flotation in July 2014. Continued high levels of M&A activity in the healthcare sector could also pump up the share price long before a bid emerges.
Also before any offer materialises for the 70 per cent it does not own, Mediclinic will bring the breadth of its experience to the benefit of Spire, say analysts at stockbroker Investec. Mediclinic's bosses may well influence the way that Spire grows, grooming it into the kind of company they would like to eventually acquire. Mediclinic's chief executive, Danie Meintjes, already has a non-executive seat on Spire's board. All this said, Mediclinic is prohibited from making a full offer for Spire before the end of the year unless a third party comes forward or Spire announces a reverse takeover. However, there is a provision stipulating that "a material change in circumstances" would be sufficient grounds to permit an offer.
In the long term we think the appeal of Spire is unchanged. Even if the number of "choose and book" referrals from the NHS falls thanks to penalty-free waiting lists, the prospect of extended waiting times for standard procedures means it's still likely that affluent patients will opt to go private and self-fund. Also, nothing has changed the likelihood of a massive budgetary shortfall in the NHS by the end of the decade either. Besides, Spire is in the good position of being the only listed private hospitals operator of its size. Competitors, such as Cambian and Caretech, specialise in mental health and foster care and don't represent direct competition for work or for referrals. Granted, there is a concern that, as it builds its network of mostly freehold hospitals, Spire's debt pile may become burdensome; but that's an occupational hazard for capital-intensive property-based businesses on which shareholders always must keep an eye.
| SPIRE HEALTHCARE (SPI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 383p | MARKET VALUE: | £1.53bn | |
| TOUCH: | 382-383p | 12M HIGH / LOW: | 403p | 255p |
| FWD DIVIDEND YIELD: | 1.1% | FWD PE RATIO: | 18 | |
| NET ASSET VALUE: | 244p* | NET DEBT: | 43% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 739 | -39.6 | na | na |
| 2013 | 765 | -42.4 | na | na |
| 2014 | 856 | 28.5 | 13.1 | 1.8 |
| 2015† | 938 | 96.6 | 21.6 | 3.8 |
| 2016† | 1,002 | 105.9 | 20.9 | 4.2 |
| % change | +7 | +10 | -3 | +11 |
Normal market size: 5,000 Matched bargain trading Beta: 0.9 *Includes intangible assets of £519m, or 130p a share †Investec forecasts | ||||
