Why Wesfarmers Ltd should buy Healthscope

Some analysts may look poorly on conglomerates but that doesn't mean you should.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It doesn't matter whether it is Warren Buffett, one of the world's richest people and the CEO of conglomerate Berkshire Hathaway Inc. (NYSE: BRK.A) which has a proven track record of creating shareholder value, or CEO Richard Goyder at Australia's largest conglomerate Wesfarmers Ltd (ASX: WES), almost without fail, sell-side analysts love to hate the conglomerate structure.

For the most part it would seem that analysts at major broking houses prefer to be able to easily compartmentalise a company. A company which fits neatly into a group with peers makes comparisons and relative valuations easier; whereas a company such as Wesfarmers is a 'headache' for analysts – is it a coal miner, a retailer, a fertiliser supplier?

Recent strategic moves by Wesfarmers which have led to certain business units being sold off including gas assets, insurance broking assets and the $1.8 billion insurance underwriting sale to Insurance Australia Group Limited (ASX: IAG) have resulted in the conglomerate's focus narrowing and the retailing businesses increasing their dominance within the group. The asset sales have also boosted Wesfarmers' cash holding and balance sheet power and a large acquisition is considered likely.

Last week The Australian Financial Review (AFR) reported murmurs that Wesfarmers was running the ruler over healthcare operator Healthscope, which competes with Ramsay Health Care Limited (ASX: RHC) in the private hospital industry and Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) in the pathology and medical centre industries. According to the AFR, analysts – predictably – questioned the merits of Wesfarmers acquiring Healthscope.

Foolish takeaway

As predictable as it is that sell-side analysts would be against a move into a non-aligned industry, investors and Wesfarmers' shareholders have reason to be positive of such a move – should it eventuate. Goyder and his team have a disciplined approach to acquisitions with a focus on not overpaying, generating adequate returns on invested capital and creating shareholder value. Given the long-term tailwind of healthcare, a purchase of such a large business at the right price could be a fantastic addition to the Wesfarmers' conglomerate.

Motley Fool contributor Tim McArthur owns shares in Primary Health Care Ltd.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »