US private equity firm KKR has swooped in to buy a stake in the Philippines’ biggest private hospital chain, Metro Pacific Hospital Holdings, blocking a potential $1.6 billion listing and bolstering its ties with the powerful Salim family.
Metro Pacific Investments, the indebted infrastructure investment firm, said it will raise P35.3 billion ($684 million) from the sale to KKR of shares and bonds in its fast-growing hospital chain, according to a filing with the Philippines stock exchange on Tuesday.
The deal comes as more Filipinos seek premium medical services, driven by rising per-capita incomes and rapid urbanisation. The country's healthcare market is growing at a double-digit percentage rate year-on-year and is worth about $15 billion, but with just one hospital bed per 1,000 people it has less than half the cover available in the rest of the Asean bloc, according to the World Health Organisation.
“The growth in demand in a fairly underpenetrated market in terms of healthcare services per capita, plus the opportunity to back one of the best assets and teams in the country, is an interesting combination for us,” Neal Kok, a principal at KKR based in Singapore told FinanceAsia.
Metro Pacific Hospitals is the Philippines’ largest operator of private hospitals in terms of authorised bed capacity and revenue, with 14 hospitals and about 3,200 beds across the country. It is targeting 5,000 beds and 30 hospitals by 2030.
“Our plans for the future of Metro Pacific Hospitals are ambitious," said Manuel Pangilinan, chairman of Metro Pacific Investments and Metro Pacific Hospitals in a press release.
Growing investor interest in hospitals is a trend reflected across the Asia-Pacific region, with a total of $5.16 billion invested via 93 deals last year compared with $321 million and 40 deals a decade earlier, Dealogic data shows.
Private equity investment in the sector has surged in lockstep. KKR alone has invested in healthcare companies across the region including India’s Radiant Life Care, China’s Kareway Health and Australia’s GenesisCare.
Hospital chains including Australia’s Healthscope, Singapore’s Parkway Holdings and Malaysia’s IHH Healthcare have all attracted large dollops of capital in recent years as investors bet that a growing middle class will spend more on their health.
According to recent research from Citigroup, the next billion middle-class consumers are likely to be 90% Asian.
As a result, healthcare coverage is expanding rapidly across Asia, boosting demand for medical services. China has reached 95% coverage with its basic medical insurance, India plans to roll out healthcare insurance to nearly 100 million families and in Indonesia, nearly 200 million people are now covered by health insurance.
PAYING DOWN DEBT
Metro Pacific Investments is cashing in on some of that swelling interest to pare down its burgeoning bank borrowings. It had been running an M&A auction for a 40% stake in the hospital chain at the same time as filing for an initial public offering to see how it could raise the most cash, before choosing the former.
KKR short-circuited the dual-track process despite stiff competition by other bidders by offering a valuation post-money of $1.6 billion for Metro Pacific Hospitals, certainty of execution within a shorter time frame than a potential IPO.
Under the terms of the agreement, the KKR-led consortium will subscribe to P5.2 billion-worth of 41,366,178 new common shares, or 6.25% of the aggregate par value of the hospital chain. This values Metro Pacific Hospitals at a post-money equity valuation of $1.6 billion.
As part of the agreement, Singapore’s sovereign wealth fund GIC will reinvest its 14.4% stake in Metro Pacific Hospitals alongside KKR.
The KKR-led consortium will also invest in a P30.1 billion mandatorily exchangeable bond issued by Metro Pacific Investments. The bonds are exchangeable for 239,932,962 common shares in Metro Pacific Hospitals in the next 10 years or if the company lists. If the bonds were exchanged then KKR and GIC would own about 42.5% of Metro Pacific Hospitals.
Since Metro Pacific Investments will continue to own about 57.5% of the hospital chain, even after the bonds are exchanged into Metro Pacific Hospitals, KKR’s experience growing similar businesses around the region were an added reason to partner with the private equity firm.
Apart from paying down debt, some capital will be left from the capital-raising to support Metro Pacific Hospitals' potential investments into additional hospitals and healthcare businesses. KKR plans to help doctors and nurses do their jobs more effectively by upgrading hospital infrastructure and equipment and redrawing processes to reduce patient waiting times.
“Overall, we’re trying to provide best-in-class healthcare,” said KKR’s Kok.
Metro Pacific Hospitals, which has a market share of about 40% in premium private hospitals, has grown rapidly organically and through M&A across the Philippines. Its hospitals are mostly in Manilla and Luzon, while only four are located in Mindanao and Visayas.
“There is a lot of opportunity to grow hospital services outside Luzon and management have shown that they have that ability to do it,” said KKR’s Kok.
FAMILY TIES
The Metro Pacific Hospitals transaction also strengthens KKR’s ties with the powerful Salim family.
KKR teamed up with Tencent last October to invest in digital payment platform Voyager Innovations, which is owned by Philippines telecoms giant PLDT. Metro Pacific Investments and PLDT both share the same parent, First Pacific, a holding company chaired by Indonesian billionaire Anthoni Salim.
In Indonesia, KKR invested alongside First Pacific in Nippon Indosari, an Indonesian leading mass-market bread company that markets products under the brand Sari Roti.
“We really believe in trying to build long-term relationships and do repeat business, especially in Asia with conglomerates and families that are aligned with our investment and governance philosophies,” said KKR’s Kok. “Partnerships are a key part of how we invest in Asia.”
The investment in Metro Pacific Hospitals is expected to complete by the end of 2019 and will source the capital from its Asian Fund III.
Bank of America Merrill Lynch and UBS are acting as financial advisors to Metro Pacific Investments and GIC. Milbank and Picazo Buyco Tan Fider & Santos are acting as legal counsels to Metro Pacific Investments and GIC. Simpson Thacher & Bartlett and Sycip Salazar Hernandez & Gatmaitan are acting as legal counsels to KKR.
