Finance Minister Mathias Cormann yesterday provided an overwhelming case for more privatisations, but while the government has had a clear success with the Medibank sale, it will be a long time before investors reap similar rewards.
The $5.7 billion sale price, at $2.15 a share, works out at 23 times forecast earnings, which is a whopping 63 per cent premium to the market and will take some time to be validated.
The sale price was 7 per cent above the $2 retail offer, so the 1.7 billion bits of paper in retail hands are already worth something. At $2.15, it works out at 3.7 per cent dividend yield, so there is value.
The pricing comes between listed health fund NIB and the listed hospitals, Healthscope and Ramsay, which are selling at 25 times.
These big premiums highlight the value in health funds, with ageing demographics providing almost guaranteed GDP-plus growth.
The sale process was well handled by Cormann’s team, including in-house adviser Lazard and float brokers Deutsche, Goldman and Macquarie.
The adviser fees will total about $35 million, which works out at just over 0.6 per cent of the float value compared to the 1.4 per cent earned by the Queensland Rail (Aurizon) sale.
The bookbuild was well handled, leveraging the known excess demand by telling fund managers orders would be based on the first-day bids with allocations assured if the first day bids came in at, or above, the eventual sale price of $2.15 a share.
This means fund managers essentially bid blind and were forced to put their top price in first without the usual gaming of the process as the three-day bookbuild proceeded.
The government had control of the bookbuild, which at least mitigated the normal games where favoured clients get the best treatment.
Nib boss Mark Fitzgibbon has raised the prospect of de-regulating the industry rather than the government setting the industry premiums each year.
Fitzgibbon has logic and common sense on his side, but it would be strange for the government to deregulate in the first year after selling Medibank Private.
The most honest solution would have been to declare deregulation ahead of the sale, but not only has that not happened but Medibank’s George Savvides has already told us he will be hiking his premiums by 6.5 per cent next year.
Given he speaks for 30 per cent of the industry, that is a fair guess of what will happen to overall premiums.
Deregulation should happen sooner rather than later and yet again government has put good public policy on hold to milk better returns from a privatisation.
The Howard government did this with the $14bn Telstra sale and we are still paying the costs.
There is no way Medibank’s Savvides will miss his profit numbers in year one given the prospectus details risk premiums above industry averages and all sorts of provisions that can be easily translated into 2015 year profits.
Savvides is a long-time boss and will stay in the job until 2017, which means the search for his replacement should be under way now.
The reason for caution about the float is the question of just how much better the company will be in private hands. There is clear upside on margins given industry leader Bupa two years ago was operating with an expenses ratio of 8.5 per cent and a 6.6 per cent margin.
Savvides is tipping an improved margin of between 4.4 to 4.9 per cent and an expenses ratio falling from 9.2 per cent to 8.7 per cent.
There is plenty of work to do by the same management team that has produced the most recent sub-scale performance.
The credibility of the grand push to change the insurer to an “assurance” company by managing patients better was hit by the $134m write down on the $650m health solutions business due to the loss of the Immigration Department contract.
If this is the place for future earnings, there is work to do here as well.
That said, it’s a great brand in the right sector and earnings are heading in the right direction.
Watching the money come in the door on this float can only whet Tony Abbott’s desire for more.
Already on the to-do list is the ASIC registry business. Then, with policy questions hopefully out of the way, Australia Post looms large on the horizon.
This article was originally published in the Australian Business Review.