MBF waves the white flag

It can't have been easy for MBF Australia to come to the decision to sell itself to a rival health insurer, UK-owned BUPA Australia, and become the first of the big insurance mutuals to surrender its independence rather than float on the ASX.
Indeed, had it not been for the float of the smaller health insurer NIB Holdings earlier this year, MBF might well have ignored BUPA and forged ahead with its plan to demutualise and list on the exchange. It wouldn't have been overly criticised – until a mutual lists it's difficult to establish its value with any precision and its policyholders/contributors don't see themselves as owners and therefore are unlikely to complain.

The NIB listing, however, did provide a pricing point for a health insurer and, while MBF is a lot larger and more diverse, it was evident to MBF that the very significant increase in BUPA's offer earlier this month put the bid into a ballpark that made it very difficult to refuse.

MBF's own estimate of the upper end of the range of its likely market capitalisation was $1.8 billion. The initial BUPA offer of $2 billion could therefore be ignored. At $2.41 billion – BUPA's "final" offer – the premium was too large to cast aside. Plus, BUPA invited MBF's John Conde to become chairman of the board of a merged group where both entities will have equal representation. MBF's chief executive, Eric Dodd, will oversee the integration before shifting to non-executive status, probably to be succeeded by BUPA's Richard Bowden.

Presumably BUPA was generous towards the MBF leadership, not only because they are competent, but because it wants to reassure MBF's "council" and contributors that their interests won't be abandoned (as well as to dull the impact on the MBF board of relinquishing their ambition of being the industry consolidator).

The BUPA bid was a test of the board, Dodd and the governance structure they created for the mutual, which attempted to synthesise the workings of a public company and to make them accountable, which would not have been the case in a conventional mutual. Self-evidently, the decision to elevate value over corporate ambition suggests they passed it.

MBF's council – representatives of a cross-section of its membership that substitutes for a listed company shareholder base – has yet to endorse the decision and its contributors/members will have to approve the demutualisation and sale. But it would be unusual if they ignored the guidance of their board.

One assumes MBF wasn't only mindful of the dollars and the opportunity to put together two health insurers that fit perfectly to create a national competitor to Medibank Private. MBF is strong in NSW, Queensland and Tasmania while BUPA's HBA and Mutual Community brands are strong in Victoria and South Australia.

The scale and the synergies from merging the groups could also provide a useful buffer against a change in attitude in Canberra towards private health insurance. If the Rudd government were to reduce or withdraw the rebate for private health insurance the sector would be damaged. Given that risk, the certainty of $2.41 billion of cash would have looked that much more compelling.