Capio a good fit for Ramsay
Recommendation
Ramsay Health Care is no longer a local hospital operator with some bolt-on overseas businesses. When the purchase of Nordic-based Capio completes, it will be more European than Australian. Revenue from European sources will swell to 57%, up from 46%. Almost as much money will be earned in France as in Australia, and a further 20% will come from Germany, the UK, and Nordic countries.
Capio is the market leader in Sweden and the second-largest operator in Norway, as well as being the third largest acute care provider in France. The company has 40 hospitals and a further 149 primary care and specialist clinics generating revenue of around $2.5bn and earnings before interest, tax, depreciation and amortisation (EBITDA) of roughly $186m.
Key Points
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$1.3bn purchase of Nordic operator
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Balance sheet worse off
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Deal looks fair, despite rejection
Rather than Ramsay itself making the acquisition, Capio will be purchased by Ramsay's 51% owned French subsidiary, Ramsay Générale de Santé. That being the case, Ramsay will only be entitled to a 51% share of Capio's earnings, so the deal is unlikely to impact profits materially in the short term given that Ramsay had $1.2bn in EBITDA in 2018.
It will, however, materially impact Ramsay's balance sheet. Capio has net debt of €374m and the offer price of €788m works out at around $1.3bn for the equity at current exchange rates. Ramsay Générale de Santé will fund the purchase with debt (€238m) and equity (€550m) ... and Ramsay will fund its share of that equity (€314m) using debt (sheesh!).
The overall effect is an increase of roughly 15% in Ramsay's net debt. Including Ramsay's share of Capio's EBITDA, Ramsay's net debt-to-EBITDA ratio will increase from 2.6 to around 2.9. It's not the direction we like to see a company's leverage ratio move, but it's still a relatively small acquisition for a company of Ramsay's size.
Desperate for growth
The deal was initially rejected by Capio's directors back in September. It was only when Ramsay upped the offer price by 20% that Capio's board accepted. A 20% hike would normally make us baulk - especially for slow-growing hospital assets - but, in this case, the offer price places Capio's enterprise value (EV) at 10 times EBITDA. This looks like a fair price, especially when you consider Ramsay itself has an EV/EBITDA ratio of 12.
That Ramsay was willing to increase its bid by such a margin suggests two things: management is probably a little desperate for growth; and it reckons it's worth paying a premium for the largest operator in higher-growth Nordic countries.
The settlement date is expected to be 15 November, though Ramsay will only take full control in the first half of 2019 following the compulsory acquisition of shares whose owners did not accept the deal. Some 96% of Capio shareholders have already accepted and Ramsay has clearance from the French competition regulator, so all conditions attached to the takeover have now been ticked off.
Ramsay's share price is largely unchanged since Is Ramsay Health Care a property play? from 24 Oct 18 (Buy - $54.98). With a free cash flow yield of 4.8% and a price-earnings ratio of 19, we're sticking with BUY.