Funding Overhang Weighs On Ramsay’s Rebound

Australia | Jun 10 2021

With earnings momentum coming out of covid, Ramsay Health Care looks set to rebound from the pandemic downturn in surgeries, but the Spire acquisition raises questions over the company's balance sheet and funding options

-Acquisition of UK-based Spire Healthcare threatens investment grade credit rating for Ramsay Health Care
-Company may be in need of up to $1.5bn in additional capital
-Sale and leaseback of Australian assets a likely option

By Mark Story

Despite some encouraging green shoots emerging for a primary casualty of the coronavirus pandemic, Ramsay Health Care ((RHC)), brokers are waiting for valuable insights into how its latest UK-based acquisition will be funded.

The decision to acquire Spire Healthcare in the UK, which will require $1bn to 1.5bn in capital, has also raised concerns over Ramsay’s capital position, and what it could do to the company’s investment grade credit rating.

News of Ramsay’s offer to acquire 100% of Spire Healthcare, one of the UK’s leading operators with a network of 73 hospitals, comes on the heels of a tumultuous 12 months for Australia's number one operator of private hospitals.

Due to elective surgery shutdowns and having to open up its resources to public health systems in Australia, the UK and France to help combat covid, Ramsay experienced a profit fall of -12.5% in the first half of FY21.

But despite the pandemic, Ramsay always had one eye on future growth opportunities which in the last 12 months also saw the company complete a whopping $1.4bn equity raising.

While the Spire acquisition is the first of those growth opportunities, Ramsay CEO Craig McNally recently told investors and analysts the company is likely to be pursing further acquisitions within the UK’s healthcare system.

The company clearly sees a blow out in already lengthy surgery and appointment wait times following the pandemic as a golden opportunity. Ramsay is also expected to continue to expand via other European acquisitions, most recently in France and the Nordics.

Closer to home, pressure on public health systems generally bodes well for private sector operators like Ramsay. The company is currently witnessing a strong resumption of surgeries in Australia.

However, due to uncertainty around future restrictions or lockdowns, Ramsay has not provided specific guidance on the magnitude of the bounce-back in surgeries that analysts are clearly looking for.

Despite limited guidance from management on the speed at which surgeries will bounce back in Australia, Citi expects earnings to normalise as the pandemic ends. The broker assumes Australian volumes will normalise in the first half FY22, and normalise in the UK/France in calendar year 2022.

Citi also views FY23 as a normal earnings year for the company.

All eyes are on Spire

Meantime, Ramsay Health Care’s bid for Spire Healthcare in the UK is commanding all the brokers’ attention.

In late May, Ramsay announced it had bid 240p per share for Spire, at a 24% premium to the last close in an agreed deal. This values the equity of Spire at circa GBP1bn.

Citi remains somewhat confused about what the combined strategy for the UK will be post transaction. Ramsay UK is a day patient business with 84% of its revenue generated from these patients. While Spire is also mostly a day patient business at 62% of revenue, it generates a significant portion of its revenue from inpatient activities.

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