Strong deal-making interest is one reason why I think investors should buy any weakness in the price of hospital operator Healthscope Ltd (ASX: HSO) – the latest to come under the merger spotlight.
The stock jumped 1.9% to $2.65 in early trade after The Australian reported that Chinese investment conglomerate Fosun International is keen on taking a big slice of the company by buying out private equity firms TPG and Carlyle Group's $900 million investment in Healthscope.
The private equity firms were behind the float of Healthscope over a year ago and will likely be looking to sell their 350 million shares in the company when they come out of escrow before the end of the calendar year.
Not everyone is convinced that Fosun is set to pounce though. The fact that $945 million worth of Healthscope changed hands yesterday after CT Healthscope sold down its holdings through a block trade to various investors is one sign that Fosun is not looking to gain a foothold in the company.
Reports that TPG and Carlyle are looking to sell their stakes on market are also throwing water on the Fosun theory. The private equity groups will theoretically get more for their shares if they sold them to a strategic investor instead of flooding the market with supply of the stock.
However, there are two points that support rumours of Fosun's interest in the company. The first is a report by the Australian Financial Review that said an offshore party had contacted the Foreign Investment Review Board to gain approval to make a major stock purchase.
It is not known if this is Fosun as Malaysia's IHH, Singapore's Parkway and US-based HCA are also believed to be keen on Healthscope.
The second point is Fosun has recently raised $US1.5 billion in fresh capital for investments. If Fosun chooses not to move on Healthscope, it won't be due to the lack of funds.
It is also well documented that Fosun likes the company and tried to buy it before it floated on the stock exchange. Fosun wants to bring Healthscope's business to the much larger Chinese market.
Healthscope looks like an interesting investment, but I think the stock is looking fully priced on a 2015-16 consensus price-earnings multiple of 25x.
I prefer its peer Ramsay Health Care Limited (ASX: RHC) as I believe it has more growth options even though Ramsay trades at a similar P/E to Healthscope.