Healthscope turns down both offers

In a surprise move, private hospital operator Healthscope has rejected both takeover bids currently on the table – one from asset manager Brookfield and another by an AustralianSuper-led consortium (see Healthscope gets higher offer).

The board says both bids undervalue Healthscope, particularly given recent improvements in operating performance and the benefits it expects to flow from the soon-to-open Northern Beaches Hospital. ‘Northern Beaches is expected to deliver over $300m in additional revenue and a return on invested capital of at least 15%,' management said. 

We're surprised by the decision but agree that the bids undervalued the company, though only modestly compared to our recommended Sell price of $2.70. It wouldn't be surprising if one or both bidders increase their offer price, so this might not be the last we hear about the takeover.  

The board has floated the idea of selling some or all of its 29 freehold hospital properties – with a market value of more than $1.3bn – and then leasing them back. The move would free up a significant amount of capital, some of which could be used to pay off part of Healthscope's $1.7bn of net debt, which has been accumulating during the construction of Northern Beaches Hospital.

Management lowered guidance slightly for 2018 earnings and now expects operating profits of $340–345m, compared to $359m achieved in 2017. Furthermore, Healthscope flagged $17m of asset write-downs associated with a decision to close two poorly performing Victorian hospitals, and a $68m impairment charge associated with an onerous lease at Frankston Private Hospital. 

On a more positive note, management is targeting operating profit growth of at least 10% in 2019, and growth should continue as the Northern Beaches Hospital ramps up over the next few years following its scheduled opening in October. HOLD.