A week after building up a 6.7 per cent stake and suggesting closer co-operation and making a ‘confidential proposal’ Primary Health Care has proposed a “merger of equals” with its rival,Symbion Health.
If it comes off it will be a big punt gone right:trying to do a ‘merger of equals’ in the current market climate, which demands a ‘control premium’ at every possible approach, will be a big achievement, a financial miracle of sorts.
It’s not an official bid as such, more an informal indication of Primary’s thinking. Symbion’s response was predictable: ‘no, they are dreaming, etc etc’.
Primary said that subject to negotiation there would be a merger ratio of one Primary share for every four Symbion shares, or $3.50 in cash per Symbion share.
Primary shares were trading around $13.75 yesterday after the bid and Symbion shares were around $4.06.
It may be early days but the shares offer and the cash alternative are not designed to win anyone over, nor are they designed for a ‘merger of equals’.
They seem to be designed to emphasise to Symbion management and big shareholders that Primary sees value and knows how to get to it, unlike the SYB management.
Judging by last night’s statement from Symbion, that company and its management are not very impressed at all.
Primary said the cash alternative of $3.50 was above the three-month weighted average price of Symbion shares of $3.28 and above the average valuation of market analysts of $3.45: unfortunately these valuations don’t count when the shares have bounded above $4 a share, driven by the buying by Primary.
The offer values SYB at around $2.2 billion, the market values it at just over $2.6 billion. The bid isn’tserious at these levels!
Under the merger proposal, up to 56 per cent of the merged group would be owned by current Symbion shareholders.
That won’t be enough: a higher price, say around $4 a share is too expensive while improved terms for the shares involving the issuing of more Primary shares which might see too much of PRY end up in Symbion shareholder hands.
The big selling point remains the synergies (cost cuts) Primary said a merger would bring significant synergies, in a range of $40 million to possibly more than $100 million: Symbion says that’s overstated.
But analysts say the buying in SYB has already added around 50c a share extra into the SYB price (hence the PRY offer at $3.50 a share).
If the offer is lifted 50c to $4 then that’s another $300 million in extra cost, or three years of those cost cuts, which makes it a very expensive bid.
Primary said the benefits of a merger included shareholders being able to share in any realisation of these synergies in proportion to their holdings.
A merger also was simple and offered Symbion shareholders an opportunity exceeding prior or current alternatives.
Primary said it had alternative growth strategies which it continued to follow, but the scale of the synergies available under a merger and the present opportunity were compelling for both Primary and Symbion shareholders.
“Primary does not see equal alternative value-accretive options for Symbion,” Primary said.
And that’s the challenge to the SYB board: does it look to maximise the price to shareholders by driving the price as high as PRY or someone else will pay, or does it try and see the logic in a well-priced merger to drive the share price of the merged companies higher?
Primary already holds a 6.7 per cent stake in Symbion which does give it a small start on anyone else.
But SYB is still a bigger company than PRY and has unwanted assets: the consumer and distribution businesses. They are not central to the medical centres, diagnostic and pathology businesses that PRY is strong in.
Consumer would be bought tomorrow by Sigma (SIP) and while it would also like the distribution, ACCC reasons would rule that out. It could be sold to someone else (API?) or it could be floated, or a left of field buyer like Woolies or Toll Holdings could swoop.
Selling both could raise $900 million or more in a merged company which would make the merged business a leaner operation and more focused on growth.
Primary released its 2007 interim yesterday and said it posted a profit rise of almost 20 per cent in the six months to December.
Net earnings rose 19.7 per cent to $26.76 million on a 14 per cent lift in sales to $132.98 million.
Primary Health Care Ltd has posted a near 20 per cent lift in first half net profit.
CEO Ed Bateman said in a statement: “With our major focus on setting up and opening eight new centres this calendar year, with no fee increases, to have 20 per cent profit growth and continued margin growth is particularly satisfying for management and for shareholders.”
Earning before interest, tax, depreciation and amortisation rose to $53.21 million, from $44.91 million with the medical centre EBITDA margin reaching 50c (49c).
Primary opened one new centre in Victoria and plans three more this half to make a total of 35 medical centres and 40 by the end of calendar 2007.
Primary will pay an interim dividend of 21c a share, up from 20 c in the first half of 2006.
