Healthscope and its private equity backers are aiming to raise up to A$2.57 billion ($2.41 billion) in a July initial public offering that promises to be Australia's biggest in three years.
Retail books opened on Monday for the share sale by Australia’s second-largest private hospital operator, currently owned by TPG Capital and Carlyle Group, is seeking to price 1.89 billion shares at between A$1.76 and A$2.29 per unit.
The shares on offer represent 67% of the company's enlarged share capital. Once the share sale is concluded, TPG Capital and Carlyle will see their combined share holding drop to between 25% and 40% of the company, bankers close to the deal told FinanceAsia.
Healthscope will be Australia’s largest IPO since rail operator Aurizon Holdings raised A$3.99 billion in November 2010, according to Dealogic.
Macquarie Capital and UBS are the global coordinators for the issue, while Bank of America Merrill Lynch, CIMB, Credit Suisse and Goldman Sachs are handling lead manager responsibilities.
The issuer and syndicate have already lined up a handful of cornerstone investors — a mix of domestic and global fund houses and pension funds — who have agreed to purchase A$1.6 billion worth of shares once the company goes public, bankers told FinanceAsia. It's almost half of what the hospital operator aims to raise, highlighting the company's appeal to pension funds that view Healthscope as a low-risk investment and a sustainable source of revenue.
TPG and the Carlyle Group are understood to have approached BlackRock, Canada Pension Plan Investment Board and Singapore wealth fund GIC in April about Healthscope, according to Bloomberg.
Valuation
Healthscope is being marketed at 20 to 23 times forecast 2015 earnings. That values the company as highly as A$3.81 billion but is a 2% to 17% discount to its closest comparable Ramsay Health Care, Australia's largest private healthcare operator, which is trading on a multiple of 24 times forward earnings. Shares in Ramsay are up 7.44% so far this year.
Other regional peers include Malaysia’s IHH Healthcare Bhd, Thailand’s Bangkok Chain Hospital, Singapore’s Raffles Medical Group, and Phoenix Healthcare in China, which are all trading between 30 and 46 times expected 2014 earnings, Bloomberg data shows.
But most prospective investors have “zoomed in on Ramsay” as the main comparable, one banker told FinanceAsia, citing similar dynamics, growth stories, and the fact both operate in the same country.
Ramsay, which already boasts the largest portfolio of private hospitals in Australia, has been expanding its footprint in Europe and Southeast Asia. It announced plans earlier in June to acquire 75 facilities in France, including 61 hospitals, from Générale de Santé, making Ramsay the largest operator of private hospitals in France.
Unlike Ramsay, Healthscope intends to focus on its domestic expansion and plans to use the proceeds raised to build new private hospitals, as well as pay back some loans. The company had a net debt of A$865.5 million as of year-end 2013.
Industry outlook
It’s been a difficult year so far for IPOs in the Asia-Pacific region. Slowing economic growth in China coupled with issuers continuing to churn out bonds amid a rock-bottom interest rate environment has seen a number of high-profile deals being shelved and led to a poor aftermarket performance.
However, long-term investors may find Healthscope enticing. The Australian healthcare sector is an important part of the country’s economy, with total healthcare expenditure growing at a compound annual growth rate of 8.3% from $63 billion in 2002 to $140 billion by year-end 2012, according to Healthscope’s prospectus.
Yet there is still plenty of room for growth. Australians only spent 9.5% of their wealth on healthcare as of year-end 2012, behind other developed counterparts, such as the US (17.7%), Canada (11.2%), New Zealand (10.3%), and the UK (9.4%).
Healthscope’s supporters play up the country's favourable demographics and government incentives designed to support the private health sector. Australia’s rapidly ageing and wealthy population will lead to surging demand for medical services in the next decade, much of it private.
And as the country’s public healthcare system continues to come under pressure — healthcare costs are increasing, waiting lists are growing, and state funding for public hospitals is expected to fall by $15 billion from 2017 to 2025 — the government is coming up with incentives to encourage more Australians to go private.
These incentives include a funding framework whereby the state pays a 30% rebate on private health insurance, collaborating with private hospital operators to build and operate public hospitals to ease capacity constraints, and outsourcing the treatment of public patients to the private system.
