Ramsay bids for Capio: an analysis
As reported last week, Australian giant Ramsay has bid for European hospital group Capio. Here we look at what could be the biggest operator deal in Europe since Fresenius bought Quironsalud two years ago. Does Ramsay’s bid really undervalue Capio, will other bidders enter the fray, and could this move lead to a break-up of the company?
The offer and ‘fair value’
Ramsay’s bid to acquire all shares of Capio AB through Ramsay General de Sante (GdS) saw the share price leap 23% in the space of a day. The offer of 48.5 SEK per share valued Capio at €661m, or around 8x 2018 expected EBITDA and followed the group’s announcement in late June that it was considering a divestment of the German and French businesses which made up 43% of its 2017 sales, as part of a focus on the Nordics.
Was the Capio board’s unequivocal and swift rebuff justified? A research bulletin by Credit Suisse suggests a fairer valuation would be 10-11x ’18 EBITDA or 59-67 SEK per share, at least 22% higher than Ramsay’s bid. This is based on peers in the Nordics (13-14x EV/EBITDA), Germany (13x for Rhoen but 9x for Fresenius) and France (12x for Ramsay GdS’s minority of shares).
As far as we know analysts are not giving the group a significant international premium, and the argument that Capio is greater than the sum of its parts not yet winning over its opponents.
The main downward pressures on its value are its lack of market position in France and Germany, in both of which it enjoys just a fraction of the highest-revenue group. The loss of two large contracts in Sweden and a toughening political climate there have also wreaked havoc with the company’s share price which fell 20% over the 12 months to the day before Ramsay’s offer. French tariff cuts were a factor in its less than spectacular results for 2017 but the new government’s approach means analysts are more bullish there.
Other bidders
The CS bulletin highlights French hospital group Elsan and German Fresenius, through its Helios subsidiary, as the most likely entrants into the fray, while an earlier report by the investment bank gave a host of less likely prospects including NMC Health and Netcare.
For Elsan, Capio’s stronghold in southeast France would be particularly complementary although Ramsay GdS could also garner massive synergies. For Helios, it would give it entry into France and 18 months have elapsed since it consolidated Quironsalud in Spain, making another acquisition more likely.
Elsan’s private equity ownership might give it more flexibility in a bidding war with Ramsay and Helios whose leverage could prove constraining to debt-funded offers. But on the other hand, we hear faint rumours CVC could seek an exit within the next 12 months which would make a large acquisition more unlikely. Ramsay’s low cost of capital, with global procurement deals, should not be dismissed either.
Competition issues in the French market should not come into play as neither Elsan or DgS will garner more than a 20% market share should they take over the business.
Lower margins but better ROI
Acquiring the entirety of Capio’s 7.1% EBITDA margin-business would be dilutive for both Ramsay DgS (EBITDA margin of 12.1% in 2017) and Helios (16%), but the French operations have a higher margin as they contribute proportionally more to group-wide EBITDA than revenue for Capio (39% versus 35%). See the table below (Elsan’s figures are not public and so have not been included).
| Ramsay General de Sante (year to June 31, 2017) | Fresenius Helios (calendar year 2017) | Capio (calendar year 2017) | Ramsay GdS-Capio combined (calendar year 2017) | Helios-Capio Combined (calendar year 2017) | |
|---|---|---|---|---|---|
| Revenue (€bn) | 2.2 | 8.7 | 1.5 | 3.8 | 10.2 |
| EBITDA (€m) | 266 | 1,400 | 107 | 368 | 1,500 |
| Margin (%) | 12.1% | 16% | 7.1% | 9.6% | 15% |
| Margin dilution (bps) from acquisition | 250 | 100 |
Further to that, an analyst points out that Capio scores well in another measure: “Most investors will be highly attuned to the return on investment (ROI), on which Capio scores quite highly as opposed to asset-rich, capital intense businesses. Its capex is 3% of revenues which is less than half of most hospital groups – less than a third of Spire’s, for example. It’s a fallacy to look at the Nordics’ low margins where companies are not asset-heavy and can generate higher returns, even more so than similarly asset-lite companies.”
A regional break-up or a left-of-field buyer?
What about a regional break-up, with the French operations going to a domestic competitor, the Germans the same, and the Nordics remaining with Capio? This is a good possibility with Mehilainen in Finland on the lookout for international buys. And it is clearly the preference of Capio from their end-of-June announcement.
A source close to the group agrees: “That’s definitely a possibility. There’s still plenty of growth up for grabs in the Nordics, although it depends on how you buy into the political risk.”
Could the big three South African groups be interested? A source familiar with them tells us: “Life and MediClinic won’t. Netcare? Not sure. They have their hands full with the Akeso acquisition, but possibly.”
NMC has said it wants to enter the European market in the next few years but said it would not spend big outside the GCC in 2018.
Our Analysis: Capio’s digital-focussed growth strategy, while much-respected by analysts and the healthcare community, doesn’t seem to have been bought into by retail investors. Its drive to digitalisation, reducing AVLOS and moving to outpatient bodes well in an environment of tightening state purse strings and value-based healthcare on the horizon. Maybe moving this model from being the forefront of a smaller listed group in a country with a tough current climate around private healthcare to being part of a larger international operator like Ramsay, that can export it at greater scale, makes sense.
It’s important to note that Ramsay, CVC and Fresenius all have experience taking on Capio assets, with Ramsay buying its UK operations a decade ago, CVC bought Capio Spain in 2011 which became part of Quironsalud in 2014 before Fresenius bought in 2016.
What does this mean for recent Capio appointment Attila Vegh? The fact he joined as the group simultaneously announced it was considering divesting from its non-Nordic assets indicating he was aware of the possibility of an incoming offer and therefore a role lower than CEO in a newly constituted group.
We would welcome your thoughts on this story. Email your views to Cameron Murray or call 0207 183 3779.
