Ramsay Health Care is Australia's biggest private hospital operator. Photo / 123RF
Ramsay Health Care is Australia's biggest private hospital operator. Photo / 123RF
Is US investment behemoth Kohlberg Kravis Roberts' (KKR) A$20 billion play for Australia's Ramsay Health Care a sign of things to come?
KKR — the company famous for its 1988 leveraged buyout of US tobacco and food giant RJR Nabisco — is leading a consortium making a bid for Ramsay,which is Australia's biggest private hospital operator and an ASX-listed stock that has lagged in recent years.
The play for Ramsay has given rise to speculation that more such activity could emerge down under — particularly as Australia and New Zealand struggle to shake off Covid-19's impact.
Harbour Asset Management portfolio manager Shane Solly said the possible deal for Ramsay — in which Harbour has a stake — may well precipitate others as big-name investors look for assets that may have struggled through the pandemic.
In Ramsay's case, Covid put the brake on profits as patients delayed their operations.
"It has been slow to get back to normal even though there is congestion in the public health system.
"KKR has looked through near-term uncertainty and taken a longer term view with any eye on a big pipeline of high-quality future recurring earnings, but also Ramsay's real estate component is worth more than the market is paying."
The Australian newspaper said the potential takeover puts a sale and leaseback of Ramsay's real estate portfolio back on the agenda — a move analysts expect could generate up to A$8.5b, which could part-fund the purchase.
Solly said some New Zealand real estate stocks were being discounted because of uncertainty about whether people would return to their offices after Covid-19 lockdowns.
Travel and tourism-related stocks have also been slow to restart.
"Private equity organisations are looking for these slow recovery stocks where there is cash flow that has been mis-priced by the market, and where there are underlying assets that have been mis-priced by the market," Solly said.
"There are definitely assets in the mix trading at a discount to their asset backing, but it is hard for many investors to look through the near-term headwinds."
The rest of the world is "getting on with it" while New Zealand and Australia have been slow to recover.
"There are big global funds out there sniffing around our part of the world, which is looking pretty healthy to them," Solly said.
Big ticket
Australia has seen some big-ticket infrastructure investments in recent times. In January, Canadian investment manager Brookfield bought Victorian power grid owner AusNet for A$18b.
In February, a consortium led by New York-headquartered Global Infrastructure Partners and IFM Investors bought Sydney Airport for A$23.6b.
Smaller deals - involving companies that were profitable before Covid-19 but which have been hit hard by the pandemic - have become commonplace.
RealNZ's experiences include the TSS Earnslaw steamship. Photo / Supplied
Privately-owned tourism business RealNZ was recapitalised last month in a deal led by Milford Asset Management.
RealNZ's experiences include TSS Earnslaw, Walter Peak Farm, Te Anau Glow Worm Caves and Queenstown Jet.
Brooke Bone, investment director at Milford Private Equity, said the Ramsay deal was a sign of the times now that sharemarkets are in retreat.
More to come?
So are there more Ramsay-style deals to come?
"You are already seeing it, there is no doubt in my mind," he said.
"Companies with an extended, specific set of circumstances around the pandemic that are weighing on earnings.
"Sharemarket investors don't like that, so they sell their shares and valuations come down.
"In the fullness of time, those companies should be able to recover fully.
"But the uncertainty around that gives the private equity buyers an opportunity to buy assets that are not really distressed but which are having an extended short-term downturn in their earnings caused by an external factor."
This stage of the investment cycle comes as private equity is awash with liquidity.
Low interest rates are driving funds into the larger private equity houses as people start to look for different areas to generate returns.
Private equity has been active in New Zealand's private healthcare sector.
Queensland Investment Corporation bought Evolution Healthcare - New Zealand's second largest private hospital company - from Pacific Equity Partners last year.
Waterman Capital has a stake in Mercy Ascot and Boulcott Hospital was bought by quasi private equity firm Rangitira this year.
Then there have been the infrastructure investors such as Infratil straying out of their usual patch of standard utilities and venturing into healthcare, an example being Infratil's investment in Pacific Radiology last year.
Cashed up?
"It's a sign of the times in terms of the amount of money that is out there chasing assets and the fact that interest rates are so low, people with large amounts of money are prepared to bet big on these assets," Bone said.
"The key thing is good, long-term franchises with a competitive point of difference which means that most businesses should be able to return to pre-pandemic profit levels.
"That's the type of thing that people will be looking at."
Vulcan to outperform
Forsyth Barr has retained its "outperform" rating for Vulcan Steel after the dual-listed company provided another strong trading update and upgraded its 2022 guidance for the third time.
Vulcan now expects its 2022 earnings before interest, taxation and depreciation to be $236 million–$242m and its net profit to come in at $136m–$140m, up 20 per cent and 25 per cent respectively on its previous guidance.
"Strong operating outcomes continue to be underpinned by high prices which more than offset third quarter volume headwinds," the broker said.
"Whilst the near-term outlook remains positive for Vulcan, industry commentary suggests pricing is becoming more competitive and the recent rally in global carbon steel prices may be coming to an end.
"We continue to conservatively assume a moderation in carbon steel prices over full-year 2023/24," the report said.
