HLS 0.34% $2.90 healius limited

one to keep an eye on.

  1. 2,590 Posts.
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    Whilst the markets are horrible at the moment, I think this will do very well over the next 12 months.

    Article from the Australian 22nd Feb, Bryan Firth

    Strong outcome for Dr Ed's Primary

    IF yesterday's market response is any guide, Ed Bateman's Primary Health Care is being re-rated following its victory in the battle for control of Symbion.

    Primary disclosed yesterday morning that its holding in Symbion had jumped from 65 per cent to 80 per cent, following the acceptance by Goldman Sachs JBWere of its offer for the 12 per cent it had acquired to hedge an equity swap with Healthscope.

    It's now likely that Primary will end up with 100 per cent of Symbion, securing the benefits of full ownership.

    Healthscope made the equity swap because it was considering either a rival bid for Symbion or using the threat of blocking Primary from securing full ownership as leverage to force Primary to divest Symbion's Victorian pathology assets.

    Primary was prepared to sell but the duo couldn't agree on the price.

    Healthscope on Wednesday disclosed that it had terminated the equity swap, leaving the field clear for Primary. The market responded yesterday by pushing Primary's share price up 41c, or 6.3 per cent, to $6.91.

    Investors clearly think that Primary, and Bateman as its largest shareholder, will do handsomely from the acquisition, which will unlock synergies.

    The acquisition will also boost Primary to about the 70th largest company in Australia, which will force index funds to reweight their holdings, and some may already have begun to buy.

    To achieve index weighting would probably require buying support in the range of $500 million to $550 million.

    Healthscope released its half-yearly report yesterday and that may have provided some insight as to why it folded its tent.

    The company's operating profit rose 17 per cent, but the reported result fell sharply because of costs associated with the tilt at Symbion.

    Healthscope wrote off $10.8 million worth of costs on its attempts to buy Symbion's diagnostics business, and an additional $9.9 million on the equity swap - $1.6 million in carrying costs and $8.3 million because of a fall in Symbion's share price from the $4.09 entry price to $3.98.

    That gives an indication of the risk to Healthscope had Primary called its bluff and it ended up as a locked-in minority holder in Symbion.

    The share price of Symbion would almost certainly have fallen sharply after the close of the bid. At say, $3.50 a share, Healthscope would be down more than $50 million. That's a risk it wasn't prepared to take. Healthscope is banking on payment of a $19.575 million break fee from Symbion to recoup most of those transaction costs. It remains to be seen whether Primary will agree to the payment and, if not, whether the matter ends up in the courts.

    The break fee, which was spelt out in the transaction implementation deed, related to Healthscope's Plan B proposal to acquire the diagnostics business, which required the approval of Symbion shareholders.

    The fee was payable, among other things, if a competing proposal was announced before the shareholder meeting and was successfully completed before the first anniversary of the TID, and it's presumably that clause upon which Healthscope would rely.

    However, the intent of that provision was that the competing proposal only succeeded because it convinced Symbion shareholders to vote down Plan B.

    Of course, that's not what happened. The Tax Office killed off Plan B when it refused to grant favourable tax rulings, and the TID was terminated. Commonly, that would also mean the end of any obligations, including on break fees, but it's claimed that in this case the break fee obligation survived the termination of the deed.

    Primary late last year went to the Federal Court seeking an order that, by agreeing to the break free provisions the Symbion directors breached their fiduciary duty to act bona fide in the best interests of the company.

    The court ruled that Primary had not established its case and that, as far as was known, the transaction would not have proceeded unless Symbion agreed to the break fees.

    Whether Healthscope could rely on the break fee provision is another matter. Arguably, once the TID was terminated, Primary's offer was no longer a competing proposal because there was nothing to compete with. Plan B was dead and buried.

    However, it may be that having won the battle for Symbion, Bateman is not prepared to fight over the break fee, instead concentrating on bedding down the acquisition, and extracting the synergies.

    One deal that Bateman will wish to conclude is the sale of Symbion's consumer and pharmacy (C&P) businesses. Under Plan B that was to go to the private equity groups Ironbridge Capital and Archer Capital (IAC) for $1.085 billion, which represented an EBITDA multiple of 11.5 times the expected 2007 EBITDA for C&P of $92 million.

    It's thought there are now three contenders for C&P - IAC, Sigma Pharmaceuticals and an overseas group, and a private equity group that is interested in acquiring 75 per cent in a joint venture with Primary.

    But borrowing costs have risen since the IAC deal was agreed and C&P is performing well, with EBITDA of $57 million in the first quarter. And the analysts' consensus forecast is now for full-year EBITDA in the range of $110 million to $115 million.

    An EBITDA multiple of 11.5 times would equate to $1.31 billion, at 10.5 times it would equate to $1.19 billion and at 10 times it would be $1.14 billion. That suggests Primary should realise at least $1.1 billion from the sale, and perhaps more.

    Primary appears to be heading for earnings per share in the range of 55c to 60c, and on that basis, yesterday's close of $6.91 means the shares are selling on a price-earnings ratio of 11.5 to 12.5 times.

    That's on the low side, which is why some observers are predicting the price could well be in the order of $9 (a ratio of 15 to 16 times) over the next few months.

    Merrill Lynch yesterday responded to Healthscope's capitulation by recommending Primary as a buy and said its standalone valuation for the company was $10.02 a share, with a price objective of $14.25 a share.

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