You can’t help being cynical about the second private equity grab for hospitals group, Healthscope in 8 years. The $4.1 billion the opportunistic bid won accolades this morning from the usual cheer squads in the business media on Friday morning. The Financial Review’s Chanticleer described it as “exquisitely timed”. Others praised it as a property play, selling off and leasing back the private hospitals and other assets, but failed to note that this and any extra debt, would add more costs to the health budgets of millions of people and the country.
All commentators noted that it was the second time Ben Gray had played with Healthscope, the previous time was when he ran the local arm of US private equity shark, TPG. It and another US group, Carlyle, bid and won control of the hospitals group back in 2010. They held on to it and then sold it off in 2014, more than doubling their investment of $1.9 billion.
TPG and Gray played a part in setting up the disaster that department store chain Myer has become. TPG listed it back in 2009 and moved $1.5 billion in profits offshore immediately after listing. Myer was listed at $4.10 and the shares have never reached that level in more than 8 years. The management, board and strategy on listing was weak and TPG and Gray failed to prepare Myer for the dramatic changes in the online world (Amazon was around in 2009, as was comparison shopping and iPhones).
The bidding group for Healthscope this time around is led by new Australian private equity firm BGH Capital Fund (that’s Ben Gray and two others), Australian pension fund AustralianSuper, a unit of Singaporean sovereign wealth fund GIC and Canada Pension Plan Investment Board.
The role of Australian Super will be controversial – it is the country’s biggest industry super fund (and one of the best performing) and it has been brought into the deal because it owns 14% and is largest shareholder in Healthscope. If it wasn’t included, it could have easily blocked the offer.
In fact you have to ask why Australian Super is in the deal at all and whether it has sold out. Other industry super funds with members in the healthcare industry and at Healthscope won’t be too impressed at Australian Super’s move to the shark side of the deal. Hesta for instance?
Perhaps it would have wrung a higher price for its shares and those of other shareholders by remaining independent and forcing Mr Gray and his group to lift the price from the $2.36 on offer.
That is a skinny premium of only 16% to the most recent price for the company’s shares which traded well above $3 a couple of years ago before costs and other problems forced profit downgrades. It is why the eventual price will rise from the bidders, even if it is to allow shareholders to take up any final dividend Healthscope may declare.
The most logical reason for Australian Super’s involvement is that it wants some of most of the $1 billion in property assets in Healthscope (which are a form of infrastructure), or even the new $850 million hospital the company is building in northern Sydney in partnership with the NSW Government.
Australian Super has not stuck by the company as it investments hundreds of millions of dollars in a new asset. It is a message that is hard to understand because it claims to be far more supportive of companies investing for the future than retail super funds and other investors.
In fact the Healthscope board probably feels let down by Australian Super’s defection to the group of private equity bidders.
Certainly if the group gets control of Healthscope, you can bet there will be cost cuts (staff) and that there won’t be wages rises handed out well above the current risible 2% norm.
Healthscope has taken on debt of $650 million for the project, but will be paid $400 million by the NSW government for the public hospital. Any money Australian Super pays for assets will flow to it and others in the bidding group.
The cash raised from stripping Healthscope back (for a second time) will be returned to the partners in the bidding consortium by way of big fat debt, with debt loaded back on to Healthscope before they attempt the private equity pea and thimble trick and sell the company back to super funds and other investors (who, with the help of Australian Super). In the case of Mr Gray, it will be for a second time.
