Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Takeover targets need a long-term view

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Growth prospects of healthcare sector sparking acquisition bids

Life Pharmacy is a part of Green Cross Health, which has adopted a long-term approach towards the healthcare sector. Photo / Brett Phibbs
Life Pharmacy is a part of Green Cross Health, which has adopted a long-term approach towards the healthcare sector. Photo / Brett Phibbs

The healthcare sector, which has excellent long-term growth prospects because of our ageing population, was in the headlines this week with Abano Healthcare's profit announcement, a takeover offer for Acurity Health and Green Cross Health's annual meeting.

The big question is whether the Acurity directors will take the same hardnosed approach to their takeover offer as the Abano board did when Archer Capital made an indicative bid for the Auckland-based company last year.

Twelve months ago, Abano received a letter from Archer Capital, a Sydney-based private equity firm, saying that Archer wished to acquire 100 per cent of Abano's shares for cash consideration of $7.30 to $7.50 a share.


Abano Health's Trevor Janes. Photo / Dean Purcell

This valued Abano between $124.8 million and $128.2 million, based on the number of shares on issue at the time. The indicative price range represented a historic price/earnings multiple in the 27.7 to 28.5 range.

Abano's board rejected the indicative offer for a number of reasons including:

Archer's price range fell well below the level the board considered fair value for 100 per cent control.

The indicative price did not reflect prices paid for consolidated dental businesses in Australia and the growth potential of Abano's individual businesses.

The board did not believe that Archer's involvement would yield any benefit to shareholders other than a potential short-term liquidity option.

The company's independent directors, chairman Trevor Janes, Danny Chan, Pip Dunphy, Susan Paterson and Ted van Arkel, believed that management could create long-term value for existing shareholders.

The Archer approach, which never became a formal offer, turned into a bitter and personal dispute. This was mainly because Peter Hudson, who was an Abano director and a 50/50 partner with the company in an Australian/Asian audiology business, sided with Archer. Strong opposition from Abano's independent directors wasn't surprising because the board strongly opposed an attempt by Mark Stewart's Masthead to raise its shareholding in the company from 19.9 per cent to 51 per cent in 2007. This was through a partial offer at $3.85 a share.

The independent advisers' report valued the company between $5 and $5.80 a share and Stewart's offer was unsuccessful. He sold his shareholding to Peter Hudson for $5.20 a share in early 2008.

Stewart, who is attracted by the long-term growth prospects of the health sector, immediately turned his attention to Acurity, then known as Wakefield Health.

By mid-2008 he had acquired a 15.2 per cent holding in the Wellington-based hospital group, the last 1.6 per cent at $9 a share.

In 2012 Stewart and the Royston Hospital Trust Board, which each owned 19.99 per cent of Acurity, made a joint bid to raise their combined holding from 39.98 per cent to 50.01 per cent. This was through a partial offer at $6 a share.

The independent advisers assessed the company's value between $6.92 and $7.88 a share ($119.5 million to $136 million).

Acurity's independent directors, chairman Alan Isaac, Rick Christie, Geoffrey Horne, Brian Martin and Jay Tyler, unanimously recommended that shareholders should not accept the offer but the Stewart/Royston Hospital Trust consortium reached its 50.01 per cent target, mainly because AMP accepted in respect of some of its shareholding.

But the big difference between Abano and Acurity is that the former actively opposed the Stewart offer whereas the latter adopted a passive approach to the Stewart/Royston bid.

Abano actively contacted shareholders to try to convince them not to sell whereas there is no evidence that Acurity made any direct contact with shareholders.

This week Stewart, Royston and Evolution Healthcare, the Australian-based company that recently acquired an 11.7 per cent stake in Acurity, made a full takeover bid for the Wellington-based company at $6.50 a share.

It appears that Stewart and the Royston Hospital Trust, which is based in Hawkes Bay, will each own 37.5 per cent of Acurity and Evolution the remaining 25 per cent if the offer is successful.

Evolution appears to be a driving force behind the bid because the offering company is currently 100 per cent owned by the Australian company and the two main signatories to the takeover notice are Evolution employees.

The $6.50 a share offer values Acurity at $112.2 million compared with the $119.5 to $136 million independent advisers' valuation two years ago.

It is difficult to use the 2012 independent valuation as a basis for an updated Acurity valuation because the company has changed its accounting policies on associate interests since 2012.

However, in the past two years Acurity's adjusted net profit after tax has risen from $6.5 million to $7.2 million, adjusted earnings per share from 38c to 42c, the dividend from 17c to 23c, net debt has fallen from $36.1 million to $30.5 million and the benchmark NZX50 Gross Index has surged more than 40 per cent.

Given these factors, in addition to optimistic comments by chairman Alan Isaac in the recent annual report, it would be a huge surprise if the latest independent assessment didn't place a higher value on Acurity than the $6.92 to $7.88 a share range two years ago (there has been no increase in the number of shares on issue since the last independent report).

But the big question is how will Acurity's independent directors respond to an independent valuation in excess of the $6.50 a share bid price?

Will they try to negotiate a higher price or will they just put a hard-to-find "don't sell" comment in the target company statement and leave it at that?

The early signs are not encouraging as the initial "shareholders are recommended to take no action" letter was signed by chief executive Ian England, who is not a director.

Why didn't any of the independent directors sign this letter?

Finally, Green Cross Health, formerly known as Beauty Direct, Life Pharmacy and Pharmacybrands, held an upbeat annual meeting in Auckland on Wednesday.

Green Cross, which supports a network of 300 pharmacies, 34 medical centres with nearly 200,000 patients and community nursing services, has adopted a long-term approach towards the healthcare sector and this strategy has been successful.

Chairman Peter Merton, who owns 31 per cent of Green Cross, told the meeting that the company's priority was growth, particularly in medical centres and community healthcare.

However, he noted that the company would allocate additional resources to develop the necessary systems to accelerate long-term growth and this would mean a lower rate of profit growth in the short term.

Thus, one of the main issues facing the New Zealand sharemarket is that domestic investors and directors of takeover targeted companies usually take a short-term view even though the average KiwiSaver member has 30 years to go before retirement and many industries have long-term characteristics. In addition, independent valuations are biased towards the short-term performance of a target company and don't fully capture their long-term prospects.

With this in mind, it would be fantastic to see Acurity's independent directors take a hardnosed approach towards the Stewart/Royston/Evolution offer.

It is inconceivable that they would recommend a $6.50 a share offer when the company was valued between $6.92 ad $7.88 a share two years ago, its earnings have grown since then and the NZX has surged 40 per cent.

Brian Gaynor is an executive director of Milford Asset Management which holds shares in Abano Healthcare, Acurity Health and Green Cross Health on behalf of clients.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

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