Major operation: Analysts say Australia's Ramsay Health Care may look to the UK's National Health Service market to bolster earnings. Photo: Glen Hunt
The biggest shake-up in the history of Britain's state-run health service is poised to entice Australia's Ramsay Health Care to pursue its largest deal.
Ramsay, based in Sydney, faces slowing profit growth as it runs out of room to expand in Australia. The private hospital operator more than doubled net income in the past three years, making it the fastest growing healthcare provider valued at $1 billion or more in the developed Asia-Pacific region, according to data compiled by Bloomberg. Now, analysts expect earnings to rise no more than 13 per cent in each of the next three years.
As the UK's National Health Service refers more patients to private providers in an effort to cut costs, Ramsay may look to that market to bolster earnings, said Wilson HTM Investment Group. While UK hospitals generate the company's highest profit margins, the unit only accounts for 14 per cent of sales. London-based Spire Healthcare, which may fetch $1.9 billion in a takeover, and BMI Healthcare are both potential targets, said Deutsche Bank. That would surpass Ramsay's top deal - the $1.1 billion purchase of Affinity Health.
"They have capacity to do a sizeable acquisition," Derek Jellinek, an analyst at CIMB Group Holdings in Sydney, said. "It's just a matter of time. The growth has been so strong for so long that they need 'ex-Oz' growth to support what has become, as a business, a sizeable entity."
Carmel Monaghan, a Brisbane-based spokeswoman for Ramsay, declined to comment beyond the company's annual report.
Psychiatric Facility
"Our UK business is well placed to capture future growth in NHS volumes," Ramsay said in the report, released last month. "While we are interested in expanding in the UK given our success in this country, we will only progress opportunities that meet our investment criteria."
Formed in 1964 when Paul Ramsay converted a guest house in northern Sydney into a 16-bed psychiatric facility, the company now has a market value of $5.27 billion and runs 116 hospitals and clinics in Australia, Indonesia, France and the UK.
Profit rose to $244.1 million in fiscal 2012 from $106.5 million in the year ended June 2009, according to data compiled by Bloomberg. The 129 per cent increase is the most of any healthcare services provider in the developed Asia-Pacific region, with a market value surpassing $1 billion, the data show.
Budget Cuts
Ramsay has room to borrow for a takeover, said David Low, an analyst at Deutsche Bank in Sydney. The company's net debt-to-equity ratio, a measure of indebtedness, has fallen by more than half since June 2009.
"Now is the time to be looking," Low said. "They've got the balance sheet. Opportunities in Australia are limited. The NHS is under pressure. They will increasingly rely on the private sector to provide services."
Most Profitable Already
Patients referred by the NHS to Ramsay-run UK hospitals rose 11 per cent in the 12 months ended June, swelling the proportion of those admissions to more than 65 per cent of Ramsay's UK total. That was up from 44 per cent in the year ended June 2009, according to Ramsay filings.
The UK business generated an operating margin, before rent, of 25 per cent in the latest 12-month period, Ramsay said. Australia and three hospitals in Indonesia still accounted for 74 per cent of earnings before interest, taxes, depreciation, amortisation and rent. The company had an overall Ebitda margin of 15 per cent.
"It does make sense for them to replicate what they have," said Shane Storey, an analyst at Wilson HTM in Brisbane. "Good facilities attract good surgeons. Good surgeons get good outcomes. Good outcomes mean patients are out of hospital faster. That improves profitability."
Ramsay ranked No. 5 among private healthcare providers in the UK, with an 8.8 per cent share of the market in 2010, the country's Office of Fair Trading said in a report in April 2012. General Healthcare Group, owner of BMI, was first with 24 per cent and Spire ranked second with 18 per cent of the market.
Rising Referrals
The NHS is the UK's second-biggest buyer of private healthcare, and the number of NHS patients treated in private facilities has more than doubled in the past four years, Britain's Office of Fair Trading said.
This business is making up for a stagnant market for private healthcare in the UK, which exited a double-dip recession in the third quarter, according to CIMB's Jellinek. While private patients pay higher fees, referrals from the state-funded NHS, which pays private providers such as Ramsay for treatment, are increasing at a sufficient pace to compensate for lower profitability, said Jellinek.
The most logical target for Ramsay is Spire, which is owned by private-equity firm Cinven, according to Deutsche Bank's Low. BMI, the UK's largest private hospital group, is also a possible target, though less likely, he said.
Largest Deal
If Ramsay paid £1.2 billion ($1.8 billion), or about nine times Spire's Ebitda, the acquisition would boost fiscal 2015 earnings per share by 12 per cent, Low wrote in a November 8 report.
That depends on Ramsay leaving the hospital properties themselves with Cinven and extracting cost savings, Low wrote.
Spire, bought by Cinven in 2007 for £1.58 billion, runs 37 hospitals and nine clinics and generated sales of £674 million in 2011, according to Cinven. BMI runs 69 UK hospitals and treatment sites, its website says.
A takeover of Spire would be Ramsay's largest. It has spent $1.81 billion on 10 purchases since 2001. The biggest was the $1.1 billion takeover in 2005 of Affinity Health in Australia.
Still, there's no guarantee referrals will continue to be directed to private healthcare providers under new UK law, said Piers Ricketts, a London-based healthcare partner at KPMG.
"This in theory will bring considerable opportunities for the private sector, but in practice you'd have to be bold to bet on massive growth," he said. "Spire would be a bridgehead, but a very expensive way of acquiring additional capacity."
Competition Report
Ramsay would find an advantage in the strong Australian dollar, which is up 53 per cent against the pound since November 2007, when Ramsay bought Capio's English hospitals, said David Stanton, an analyst at Nomura Holdings in Sydney.
"The Aussie is strong and you need critical mass in a new geography to derive synergies," he said in a phone interview. "That's why they're looking."
Ramsay may also find an opportunity to strike a deal while the UK Competition Commission investigates the local private healthcare market, said Deutsche Bank's Low.
With a provisional ruling due by June and a final report expected by March 2014, Ramsay may be able to buy assets at a discount with little chance of being undermined by the final report, he said.
"I wouldn't see it as an extraordinary risk if they went down that path," he said. "They might move now in the hope of extracting a better price."
Bloomberg
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