Ramsay Health Care: Playing hardball; waiting for Board to formally reply

Author name:: By Dr Derek Jellinek
Job title:: Senior Analyst
Date posted:: 14 September 2022, 7:00 AM
Sectors Covered:: Healthcare

Deal talks have broken down between the KKR-led consortium and Ramsay Health Care's (ASX:RHC) Board, with both sides apparently digging-in their heels.
The Board wants a sweetener to the cA$85/share cash/script ‘alternative proposal’ put forward three weeks ago, while KKR indicated it would not improve deal terms, noting downward pressure on valuation with FY22 results, but left the door open if the Board reconsiders valuation and a new proposal.
While we believe a deal is not completely off the table, investors’ focus will certainly shift from M&A to the operating environment, where COVID-related headwinds are slowly subsiding, but inflationary pressures and work force issues hamper full productivity, with “normal” trading targeting FY24.
We make no changes to FY23-25 earnings, but remove a takeout premium, with our price target declining to (login to view). The sell-off looks overdone; ADD retained.

Event

RHC has indicated that KKR had responded late yesterday evening to the Board’s refusal to proceed on an ‘alternative proposal’ (cA$85/share; up to 5k RHC shares at A$88; >5k RHC shares, A$78.20 cash, 0.22 Ramsay Santé shares) for full ownership.

KKR indicated that it would not improve terms of the ‘alternative proposal’, noting FY22 results implies “meaningful downward pressure” on valuation.

KKR also stated that further due diligence may provide some “positive visibility” and if the Board is “willing to reset valuation expectations” and consider a new proposal, it would move quickly to come to acceptable terms.

RHC’s Board has yet to consider KKR’s correspondence and make a final determination.

Analysis

We find this loggerhead both surprising and disappointing, with the apparent lack of discussion on possible other proposals and KKR’s access to the data room for months (excluding Ramsay Santé), seeing us question if this is not merely hard ball tactics as opposed to the deal actually falling over.

Nevertheless, given share weakness, investor attention has clearly swung from M&A speculation back to the fundamental, underlying business, which is still contending with challenging trading conditions with inflationary pressures and work force issues headwinds to a full recovery in productivity.

That said, we view FY22 as the nadir in earnings, with COVID-related headwinds slowly subsiding, supporting the eventual return of more normalised activity in FY24 and beyond.

Over the next 3 years, we forecast underlying earnings growth c20% per annum.

Forecast and valuation update

We make no changes to FY23-25 forecasts.

We remove a A$7.74 takeover premium, with our blended DCF, PE and EV/EBITDA price target declining to (login to view).

Investment view

All eyes are now shifting from M&Ato RHC’s operating environment, which remains unpredictable and dynamic, with COVID, doctor/patient behaviour, costs and workforce issues all defining the earnings profile.

Price catalysts

AGM 29 Nov-21

Risks

KKR reigniting talks.
PHI vagaries.
COVID impacts.
Stronger/ weaker volumes.
Margin compression/expansions.
Regulatory changes.
Faster/slower Capio integration.

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