Life Healthcare’s multi-billion-rand ‘Brexit’ boost

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SUREN NAIDOO: Life Healthcare, one of only two private hospital groups listed on the JSE now, brought out its annual results today for the year ended September 2023. It punted the fact that it delivered a strong operating performance and declared total dividends for the year of 44 cents/share, which is up about 10% on last year.

But the bigger news on the day linked to its results was Life’s update on the massive R21 billion sale of its Alliance Medical Group, AMG, in the UK, which is signed but requires shareholder approval and regulatory approvals as well.

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Joining me on the line is Life Healthcare group CEO Peter Wharton-Hood to talk about the results and the big deal. Welcome to the show, Peter.

PETER WHARTON-HOOD: Good evening, Suren, and thank you very much.

SUREN NAIDOO: We’ll get into the results in a moment, but tell us about the AMG deal – how significant is it for the group? Does it mean that Life will have a Brexit of sorts from the UK?

PETER WHARTON-HOOD: Well, it is a significant transaction for us because, as you said, it’s a R21 billion transaction and a significant portion of the company. If you remember, we had said to the market for some time that while interest had been expressed in the asset we’d never engaged in a sale process.

But as executives and as directors of the company, at the right price, everything is for sale – and we got a very good price for the asset.

We did a very good deal with Icon [Infrastructure Partners]. They’ve got a good asset and both parties are happy with where they find themselves.

So yes, you might refer to it as a Brexit. This is Life Healthcare removing itself from Europe in the main, and we become a largely South African-focused business with an international business in Life Molecular [Imaging], which we can talk about separately.

SUREN NAIDOO: Life bought AMG around this time back in 2016, I believe. You’ve highlighted the disposal, but is it purely based on [being too good a deal to pass up], or is it a strategic move also by the group to change its direction to focus more on the SA business?

PETER WHARTON-HOOD: No, it’s much more of the former. If one thinks through the deal metrics, the Life Healthcare group trades on the Johannesburg Stock Exchange, including the Alliance Medical Business.

We thought we were valued about six times Ebitda [earnings before interest, tax, depreciation and amortisation] and, if you have a look in broad-brush terms where the deal was concluded, we sold it for a valuation closer to 11 times Ebitda. So when you can sell something at 11 times, and your share is trading only at six times, it’s a big value unlock for shareholders.

And in that sense we thought it was in the shareholders’ interests for us to sell the asset.

What it also allowed us to do was to realise and unlock that value without having to hold the asset for a number of years to generate that value.

So it derisks the business significantly. And in our subsequent conversations with shareholders, they have been supportive of the transaction.

So we’ve done the right thing and shareholders will have about R8.5 billion returned to them as soon as the deal is concluded and the money has been repatriated.

SUREN NAIDOO: Well, we’ll get to that in a moment, but what did Life pay for the AMG business back in 2016? Obviously a lot has changed since then.

PETER WHARTON-HOOD: Well, what we’ve done in our results presentation, we’ve actually said that as a consequence of this transaction we will deliver a net profit on the sale of the business of about R2 billion.

We recorded a R900 million loss in this year because of the way the accounting treatment has to be carried out – because it happened over year-end – and we’ll make about a R2.9 billion profit next year.

So we’ve got to net [the] two off, and say it’s about a R2 billion profit that we make on the transaction.

SUREN NAIDOO: Well, you highlighted the fact that you’re going to get net proceeds if the deal goes through of R10.8 billion. Over R8 billion is going to shareholders. I’m sure they’re going to be quite happy about that, but will the just over R2 billion go back into investing into the SA business, or will it go to pay down further debt?

PETER WHARTON-HOOD: No, it has specifically been earmarked in the circular sent to shareholders.

We had identified that after we paid down the debt we would keep R2 billion to be able to fund the acquisition of Fresenius, a renal dialysis business – which is currently subject to Competition Commission approval, and we would use the portion of the money that remains behind to put into our Life Molecular radiopharmacy nuclear medicine business, which is based offshore.

SUREN NAIDOO: You did mention that you have shareholders’ support, but I see the share price is down some 6% today. According to our website, the likes of the PIC, the Public Investment Corporation, and the IDC, the Industrial Development Corporation, [are] linked to the state in a way and they are some of your big shareholders. Are you fully confident that you have shareholder support and this deal will go through?

PETER WHARTON-HOOD: We have engaged with the majority of the shareholders in Life Healthcare and they have all, either formally or to the extent that their governance processes allow, given us positive indications, if I may say, for the transaction.

SUREN NAIDOO: Turning to the results now, most of the Sens highlighted continuing operations excluding the AMG business. Were you happy with the results overall? It seems that SA was a standout performer.

PETER WHARTON-HOOD: Yes, the significant increase in volumes through the hospital complexes, of course, is exactly what we need to generate in a hospital business.

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Higher occupancies lead to improved efficiencies, and we were very pleased with the increase in volumes.

Off the back of that, we felt that it was a very strong performance across the hospital complexes, in addition to which the emerging complementary services businesses all showed strong growth in revenues.

So the composite result for SA was a pleasing one for us.

SUREN NAIDOO: Turning to a slightly different topic, I thought I would ask – I know NHI, the National Health Insurance, is a hot topic among the medical insurers – if you have any expectations of any negative impact of NHI? What is your position on NHI?

PETER WHARTON-HOOD: Suren, let me start by saying that Life Healthcare in principle endorses the philosophy of universal healthcare access for all. It’s the right thing to do for the country.

What we don’t agree with is the approach that the government is adopting in order to implement it. We had advocated, when we were allowed to make representations, a building-blocks approach to actually get there in collaboration and partnership with the private healthcare sector.

So our primary concern is not about funding. Our primary concern is we need more doctors, we need more nurses, and we need to refurbish the infrastructure that we’ve already got access to in South Africa in order for us to be able to deliver more care to more South Africans.

So we feel that the focus actually has to shift to how the public and private sector can combine or collaborate to make this happen.

And then, can we actually deal with the elephant in the room? And the elephant in the room is we haven’t enough healthcare professionals to deliver more care to more South Africans – and that’s the piece of the puzzle that needs solving and solving urgently.

From a commercial perspective, I don’t see the NHI as a threat to Life Healthcare. I think that we’ve got a role to play in the overall delivery, and we can partner with government with our expertise and resources to be able to deliver care.

We have spare capacity in our hospitals. We should be able to utilise that for public-sector patients and not just for private-sector patients. So I think there’s an opportunity for us to get even more volume through our system. That’s in the context of a long-term outlook for us.

In the immediacy of the short term, the NHI is focused largely on delivering primary healthcare services in underserviced areas – largely nurse-driven and clinic-based – and we clearly don’t operate in that space. We operate large hospitals with high levels of acuity.

SUREN NAIDOO: Thanks for that, Peter. It sounds crazy that Covid is almost an afterthought now. Has the group fully recovered from the Covid pandemic?

PETER WHARTON-HOOD: Well, Suren, I have a wry smile on my face. I joined on August 29, 2020, which was in the middle of it. So it’s not a scar that has left me yet.

Those were very, very tough times for the organisation, specifically Life Healthcare and for healthcare practitioners in South Africa and all around the world. We are seeing a return to something resembling pre-Covid normality, if I can use those words, and it’s with a great sigh of relief that Covid is no longer the clinical demon that actually sits inside the hospitals.

We still have Covid cases, but they’re down about 73% from where they were a year ago and patients are presenting with far less severe symptoms and so on.

So I think it’s become part of the new normal, and we could probably start talking about healthcare – certainly as seen through the eyes of Life Healthcare – as being in the post-Covid era.

SUREN NAIDOO: Thank you for that. Just to conclude, what will be the group’s focus for FY 2024? Finalising the AMG deal and paying your shareholders handsomely, I guess.

PETER WHARTON-HOOD: Well, that is a promise that we made that we have to honour.

In addition, we have a number of projects that need to be delivered within the South African environment. We need to conclude the Fresenius deal.

We’ve got about R2 billion worth of capital expenditure lined up to bolster our large hospital settings.

So there’s lots of work to be done and there’s some exciting progress that will be made with our complementary services businesses in South Africa, as well as driving sales of NeuralSeek through Life Medicare in the United States.

SUREN NAIDOO: Fantastic. Peter, that’s all we have time for. Thanks for your time. That was Life Healthcare group CEO Peter Wharton-Hood.

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