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Spire and Ramsay face deal opposition

Fidelity will not accept the bid at its current level, but there are doubts about who else will table an offer
June 16, 2021
  • Shareholders are considering a 240p-a-share takeover offer for Spire Healthcare made by multibillion-dollar Australian healthcare group Ramsay
  • The company's largest institutional investor says it won't accept the offer at its current level
  • A general meeting is due to take place on 12 July 2021

As the Covid-19 pandemic gathered pace last spring, routine medical care took a back seat to virus-control measures. The redirection of resources to the front line of the crisis meant that numerous non-urgent appointments and surgeries were put on ice.

The upshot of such delays and cancellations was a significant drop in normal hospital activity. The British Medical Association (BMA) estimates that there were 3.37m fewer elective procedures in England between April 2020 and March 2021, and 21.4m fewer outpatient attendances.

But those procedures will return. And that return should bode well for Spire Healthcare (SPI), which operates 39 hospitals and eight clinics across England, Scotland and Wales.

“Spire is excellently placed as the economy reopens to benefit from a record NHS waiting list”, analysts at Liberum wrote this month. “This should drive record revenues and in turn margin improvement”.

 

A 240p-a-share offer

Liberum’s comments followed on from the news on 26 May that Australian healthcare group Ramsay (AU:RHC) had put forward a takeover offer for Spire.

The bid values each Spire share at 240p apiece – or just under £1bn for the total issued share capital – which represents a 55.8 per cent premium to the group's closing price of 154p on 5 March, the last business day before Ramsay’s first approach.

Implying an enterprise value of roughly £2bn (including lease liabilities), this equates to approximately 10.9 times Spire’s 2019 cash profits (Ebidta).

 

Not all shareholders are happy

Spire’s management has recommended the deal, and it also has the backing of top investor Mediclinic International (MDC). Ramsay has thus received irrevocable undertakings worth 30.4 per cent of Spire’s total issued share capital.

But this figure must reach at least 75 per cent for the takeover to proceed, and recent developments suggest it won’t be a seamless journey.

As first reported by Sky News, Spire’s largest institutional shareholder, Fidelity International, has said that it will oppose the deal. It has just under a 9 per cent stake.

“Ramsay’s offer to buy Spire at 240p materially undervalues the shares” in the view of Alex Wright, portfolio manager at the Fidelity Special Situations Fund (GB00B88V3X40). “Fidelity International will not be accepting the bid at this level”.

In a statement, Wright said that “[t]o put this offer in perspective, the board turned down a previous 300p per share takeover approach in 2017 when the stock had recently traded at 350p (circa 20 times earning in 2015-2017).”

The fund manager concluded that: “Spire Healthcare, one the UK’s largest private hospitals, is well-placed in the UK recovery post Covid-19, which should feed into future earnings growth. In our opinion, Spire can return back to a 2015-17 level of earnings over the next three to five years.”

 

Could a rival bidder emerge?

The key question for investors is whether a counteroffer will emerge. Liberum believes that Ramsay’s offer “is attractive with PE [private equity] unlikely to be able to generate a better return and another strategic bidder highly unlikely”.

Notwithstanding a recent spate of private equity bargain-hunting on the London Stock Exchange, Liberum argues that PE would lack the ability to eke out operational synergies with existing assets, while the commonplace tactic of accruing debt in search of growth “won’t help”.

By comparison, Ramsay – which commands a market cap of A$14.6bn (£8.0bn) – operates 37 facilities in the UK alone and has a global network spanning 10 countries. A tie-up with Spire would create the UK’s largest private hospital group.

"There are no doubt reasonable cost synergies which Ramsay brings," according to Stuart Widdowson, portfolio manager at Odyssean Investment Trust (OIT). "However an asset is only worth what someone else is prepared to pay for it. If Mediclinic is a seller of its 29.9 per cent stake at 240p and there are no other buyers, I think the transaction is likely to succeed." 

"We would be surprised if there was private equity interest at these levels", Widdowson added, "and there does not appear to be an obvious long list of alternative strategic buyers with capital and without potential competition issues”.

Still, were the deal to fail, Widdowson "suspect[s] that Spire will perform well as an independent company over the next few years”.

A general meeting to vote on Ramsay’s offer will take place on 12 July, meaning there is time before the deadline to see whether a superior bid emerges. For now, hold at 249p.

Last IC View: Sell, 115p, 6 Mar 2020