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Primary Health Care’s double Vision

Specialist hospital operator Pulse Health Limited’s (ASX: PHG) recent bid for ophthalmic surgeries business Vision Eye Institute Ltd (ASX: VEI) appears highly opportunistic but faces one major roadblock (more on that shortly).

Vision is Australia’s largest provider of ophthalmic care and operates along Australia’s East coast. The company operates eight day surgeries, 18 ophthalmic consulting clinics and 6 laser refractive clinics. Pulse operates eight specialist hospitals and both the existing chairman and fairly new CEO Phillipa Blakey have made it clear Pulse’s strategy has been to grow as a niche operator of specialist private hospitals, and specialised facilities – such as those that Vision operate.

This from Pulse chairman Stuart James in the 2014 annual report, “As a private hospital operator that is not wedded to large multi-service line hospitals with high numbers of beds, I believe that Pulse is ideally placed to meet the growing demand for more niche, individualised service provision…

The specialist hospital operator sees the merger as the combination of two specialised businesses looking to expand into complementary businesses.

The bid comes just eight weeks after Vision’s CEO & MD Brett Coverdale resigned, and the company has yet to select a replacement, suggesting Pulse see this as an opportune moment not to be missed.

Vision’s initial response to the bid doesn’t exactly drip with enthusiasm for the deal – stating “the Board notes the unsolicited and opportunistic nature of the Offer…”

And it seems investors think the deal won’t go through either, with shares trading at a 12% discount to the bid price of 1.6 Pulse Health shares for each Vision share. At current prices, that means around 88.8 cents per Vision share – which are currently trading at just 78.5 cents.

Primary block

The biggest block in Pulse’s path is medical centre, imaging and pathology specialist Primary Health Care Limited (ASX: PRY). The company owns 22% of Vision and Pulse needs at least 90% of Vision’s shareholders to approve the deal. The company would have known about Primary’s holding in Vision, and clearly expects the largest shareholder in Vision to sell out its stake.

If Primary decline, there’s no chance of the deal going through. But Pulse is clearly betting on Primary’s recently appointed CEO Peter Gregg wanting to exit from the eye care company. The medical centre operator built up its stake in Vision prior to his arrival and increased its stake to 22% in July 2014 from 20%.

Gregg was appointed as CEO and Managing Director of Primary in February this year. What’s more, the company’s CFO, Andrew Duff, resigned on June 19, but will stay on until the end of September, so there are plenty of changes happening at the company.

Gregg may see the 22% of Vision as a non-core holding, and could very well see this as a chance to exit the stake.

The problem is that selling out to Pulse, could see Primary end up with a 10.3% stake in the combined Pulse-Vision company, rather than with a wad of cash of around $31.3 million. It’s entirely possible that Primary wouldn’t mind that. It gives them a blocking stake, much like the one they had previously, and gives them a price well above Vision’s pre-bid trading price of around 68 cents.

Pulse has already received the support for the takeover from another of Vision’s major shareholders, Viburnum, which holds 15.9% of the company, which is a good start at least.

One option that the market is clearly discounting is Primary making a higher bid, but that could be a possibility. Pulse’s bid values Vision at around $160 million – loose change for Primary and its $2.5 billion market cap.

Foolish takeaway

Primary clearly holds the key to the takeover with its 22% stake, and the health care company is likely being courted by both Vision’s and Pulse’s representatives. Vision’s doctors also hold a substantial combined 7%, so they hold a powerful position in any negotiations.

Given the tailwinds in the health care industry, this could be one story worth following. The combined group could well be a target for Primary or hospital operators Healthscope Limited (ASX: HSO) or Ramsay Health Care Limited (ASX: RHC) down the track.

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Motley Fool contributor Mike King has no position in any stocks mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.