Mediclinic moves to the UK

Whoa! This is huge. Mediclinic are going to buy a 29.9 percent stake in a LSE listed business called Spire Healthcare Group from Remgro, who will acquire it first from a crowd called Cinven. The exiting shareholder, Cinven, is a private equity business who initially bought the whole business, which consisted of 25 hospitals back then from BUPA in June 2007 for 1.44 billion Pounds. The business, Spire, was listed in 2014, Ciniven's holding went from 98.6 percent to around 54 percent. I am not entirely sure whether or not they will still hold stock after this, Cinven that is, in Spire. In April this year, JP Morgan placed 40 million shares with institutional buyers to see the Cinven stake reduce to 38.3 percent. They had previously done almost exactly the same number of shares in January of this year, clearly the stake was there to be exited and this probably serves the Spire Management really well.

So who are Spire Healthcare? They are one of the leading private hospital groups in the UK, operating (as per the prospectus): "39 private hospitals and 13 clinics across England, Wales and Scotland. The Group delivered tailored, personalised care to more than 236,000 in-patients and daycase patients in 2013, and is the leading provider by volume of knee and hip operations in the United Kingdom. The Group estimates that it also had more than 1.7 million out-patient episodes (including consultations) in the same period." They are specialists in orthopaedics, one of the majors in the UK. So, older patients being more active and getting paid by the NHS, that sounds like a good place to be invested? Yes, the short answer is definitely yes.

So how is this going to work? Remgro, through a subsidiary in Jersey (Remgro Jersey, strange that, hey?) will buy the 29.9 percent stake for 8.6 billion Rand. Now you must remember that Remgro are the largest shareholder in Mediclinic, they own 41.3 percent of the business. Mediclinic, and this is the important part for us as Mediclinic shareholders, will then look to raise 10 billion Rand by offering 111 million shares at 90 Rand a share. The number of shares in issue currently is around 865 million shares, around 1 per 8 shares you have right. I guess we will know in the coming weeks how it all works out. For the time being, all you need to know is that Remgro have the money to purchase this stake (which they need to get as a matter of urgency) and secondly, Remgro are the main shareholder, who will get their own back here by underwriting the rights issue.

What are Mediclinic ultimately buying? Well, for 8.6 billion Rand, for the 29.9 percent stake, you are getting 22 million Pounds in earnings on a pro-forma adjusted basis. As per the release. At the current exchange rate, that amounts to 424 million Rand, which means that this was bought at a pretty lofty valuation, around 20 times. That is however less than the Mediclinic rating currently. The share price of Mediclinic initially sank, it is however higher, along with the rest of the market, it is up around half a percent. What they are buying, Spire Healthcare, is 9 percent higher. It is however, below the price that they are paying, 360 pence is the purchase price, currently 349 pence.

Is it a big deal? The current market cap of Mediclinic is 86 billion Rand. The purchase consideration is around 10 percent of the current market cap, there is of course going to be a dilutionary impact in time. From a profits point of view, marginally more, the business is new to the market (even though the Spire assets are older). Opportunities finding their way through the developed market, Mediclinic is evolving faster than most would have anticipated. We certainly view this as a positive, remembering that the share price performance has been awful, since it peaked at 133 Rand a couple of months ago. We continue to recommend buying this company on weakness, at and around 100 Rand a share.