Ramsay Health: KKR’s bid for sickly Aussie hospitals group is too low

Businessman Paul Ramsay instilled values of humility, loyalty, integrity and respect into his charitable foundation. It is the largest shareholder in Ramsay Health Care, Australia’s dominant private hospital operator. The foundation reportedly supports a buyout by KKR. A philanthropic body is therefore backing a buyout group whose own values are typically preceded by dollar signs.

KKR is offering A$88 per share, valuing Ramsay at A$29bn ($21bn) including net debt and leases. Success would make the deal Australia’s largest ever buyout. A 38 per cent premium to the undisturbed three-month average share price will be a tempting offer for many.

But Ramsay’s earnings have been left bedridden by the pandemic. They are ripe for recovery as restrictive lockdowns ease. Minority shareholders should heed a second opinion: push for a higher price. 

Ramsay ticks all the boxes for a buyout group on the hunt for discounted public market assets. Bans on elective surgery keep volumes depressed. Shortages of labour and protective equipment have eaten away at profits. Lockdowns in the UK and Europe have been less restrictive. Ramsay’s hospitals in those regions have performed better. Some have property assets too.

Group ebitda margins are expected to creep up by 150 basis points next year to 16 per cent as volumes improve. That forecast would reduce the prospective purchase multiple to 12 times ebitda to enterprise value from 14.4 times on 2022 earnings. Peers are trading on an average of 13 times, without takeover premiums. That suggests KKR is holding back.

KKR would doubtless squeeze margins hard. If KKR could push them 30 per cent higher and achieve an exit multiple of 16 times, it could make an annualised return of 35 per cent over five years. That would be rich by anyone’s standards.

If the buyout group increased its offer by 15 per cent, taking it closer to A$100 per share, the annualised return would be 20 per cent, an unofficial industry standard. That would better align the values — ideological and financial — of the bidder and minority shareholders.