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Hills Holdings moves away from the clothesline

The transformation of Hills Holdings (ASX: HIL) from a diversified manufacturer of roofing and clotheslines to a service-based company in the health-care sector is going from strength to strength, with the announcement of two bolt-on acquisitions.

Hills will acquire Merlon Healthcare Communications and Hospital Television Rentals (HTR) for $33.5 million, with the deals to be completed by the end of 2013. Merlon provides communications and nurse call systems to hospitals and aged-care facilities while HTR does exactly as its name suggests.

The companies will give Hills the number 1 and 2 positions in the two market segments respectively, and will contribute $25 million to Hills’ revenue. Hills expect the acquisitions to be mildly earnings per share (EPS) dilutive in the first year of ownership due to the costs and charges involved, but will be EPS accretive in the following years.

Hills CEO Ted Pretty noted that in many instances technology relationships with hospitals are long term, between 10 and 15 years, and that the purchases will give the company an entry into the sector which may have been otherwise unachievable. The deal will give Hills a presence in 300 Australian aged-care facilities and hospitals, servicing in excess of 40,000 beds.

The purchases continue the transformation of Hills since Mr Pretty stepped into the CEO role in August 2012. In that time, Hills has divested or closed a number businesses owned by the group including Bailies Ladders, Solar HW, Team Poly, Korvest, LW Gemmell and Zurn Industries, while the Hills Hoist clothesline business remains.

Hills is attempting to rapidly transform into “a provider of integrated solutions into trusted environments, including the entry into interactive patient care in Health”. This includes potentially investing in companies that will take advantage of the NBN by delivering remote-healthcare applications.

The acquisitions will be funded from Hills’ cash hoard, which is expected to swell to around $300 million by year-end. Mr Pretty has stated a desire to focus on bolt-on acquisitions in the short term, while eyeing a ‘transformational’ deal in the medium term.

Foolish takeaway

Recent divestments, acquisitions and positive commentary have resulted in a strong rally in the share price of Hills, which as doubled from a low of $0.93 in late June to Friday’s closing price of $1.88. If the lofty ambitions of the company’s new CEO are matched by the financial performance of the company over the next few years, the share price may double a few more times at least. Investors looking for exposure to the high-margin healthcare sector could do far worse than consider Hills Holdings as a medium to long-term investment.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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