Medibank's float will be a critical test for the IPO market

The health insurer has some obvious attractions, notably its brand, the fact it will comfortably rank in the top 100 listed companies after being the industry leader for 34 of its 38 years, and the lure of some easy cost cuts to meet chief executive George Savvides’s ­efficiency benchmarks.

Despite that, the promoters will be keeping an anxious eye on developments offshore.

US Federal Reserve chair Janet Yellen will call time next month on a post-financial-crisis era of easy money, and begin the countdown to sometime next year, when US interest rates will rise from the floor. Higher rates will lead to higher returns for Medibank, with most of its funds invested in government and corporate bonds, which would benefit from rising yields in the US.

However, the byproducts of volatility and uncertainty in the lead-up to a planned December listing will not be welcomed by the promoters. Against that, and in addition to Medibank’s individual charms, the health industry’s fundamentals will be a powerful lure.

All up, the industry is worth $140bn a year, including $40bn spent on private health insurance and out-of-pocket expenses.

In uncertain times, its defensive qualities will be a major selling point.

Healthscope, which owns hospitals and medical and pathology centres, raised $2.5bn in its heavily oversubscribed IPO. It listed at $2.10 a share and closed on Friday at $2.44.

Healthscope and Ramsay trade on earnings multiples of 24 to 25, with NIB Holdings, the closest comparable stock to Medibank, valued at 18 times.

Medibank looms as a critical test for the booming IPO market. While the year is on track for a record number of floats, deal flow in the third quarter fell 23 per cent to $US3.2bn compared with the previous three months.

The third quarter is usually a busy period, but concerns are elevated because of the recent weakness in markets and some newly listed companies failing to perform as expected.

All going well, though, any Medibank float should be comfortably bigger than Healthscope. It may even become the nation’s biggest IPO since QR National, now Aurizon, raised $4.05bn in December 2010.