Why Primary Health Care Limited just sold this asset for $155 million

Primary Health Care Limited (ASX: PRY) could see its share price spike today, after the medical centres, pathology and diagnostic imaging company announced the sale of Medical Director for $155 million.

Managing director peter Gregg, said:

The successful sale of Medical Director, at an attractive multiple, delivers on one of the key capital recycling initiatives from the Strategic Review. This sale, together with the proceeds from the Barangaroo property, reduces our 31 December 2015 net debt position to approximately $900 million.

Primary sold its Barangaroo office site for $40 million in November 2015.

Medical Director provides software to the health care industry, including general practitioners, specialists and allied health professionals. It was a small part of Primary’s business, generating just 2.5% of total group revenues and 5.4% of earnings before interest and tax (EBIT) in the six months to December 2015. Primary’s Medical Centres and Pathology divisions delivered a combined 86% of earnings in the last half.

The buyer is a number of funds advised by private equity firm Affinity Equity Partners.

The Medical Director business was never a core part of Primary’s business, and disposing of the asset at an attractive price — roughly 11.4x annualised earnings — means management can focus on its three remaining core businesses. That’s important right now, with pathology and imaging under intense pressure after the government announced significant cut backs in funding for those services last year.

Pathology and imaging providers rely to a large extent on government funding to cover the costs of services provided under the Medicare system, but may be forced to introduce a co-payment for patients. Sonic Healthcare Limited (ASX: SHL), Capitol Health Ltd (ASX: CAJ) and Integral Diagnostics Ltd (ASX: IDX) all face similar pressures on their businesses.

Foolish takeaway

Primary may well be clearing the decks for a potential takeover – with China-based Jangho Group snapping up an 11.178% stake just over a week ago. Jangho acquired Vision Eye Institute Ltd last year.

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Motley Fool writer/analyst Mike King owns shares in Capitol Health. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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