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Primary Health Care Limited (ASX:PRY) shares storm higher on acquisition news

The Primary Health Care Limited (ASX: PRY) share price has had a strong start to the week and pushed notably higher in morning trade.

At the time of writing the healthcare company’s shares are up almost 5% to $2.95.

Why are Primary Health Care’s shares storming higher today?

Investors have reacted positively to news that the healthcare company has signed a binding agreement to acquire Montserrat Day Hospitals.

According to the release, Montserrat Day Hospitals is an operator of seven specialist day hospitals and haematology / oncology clinics across Queensland, Western Australia, and New South Wales. In addition to its existing network, Montserrat is also in the advanced stages of developing three new facilities in South East Queensland and Western Australia and has agreed to purchase a private hospital in Western Australia.

Management has advised that Montserrat will form the nucleus of a new Primary Day Hospital division which will derive its revenue outside of the Medicare Benefits Schedule.

Primary’s managing director and CEO, Dr Malcolm Parmenter, believes that the acquisition is an exciting opportunity due to Montserrat being strategically aligned to Primary’s core business of providing frontline community healthcare.

He stated that: “Montserrat with its combination of haematology / oncology clinics and day hospitals, will deliver synergies to the benefit of other divisions. We will be able to take advantage of Montserrat facilities as we grow our specialist businesses, like IVF. We also expect that our Pathology division will be able to organically grow revenue through Montserrat over time.”

This could be bad news for fertility treatment companies Monash IVF Group Ltd (ASX: MVF) and Virtus Health Ltd (ASX: VRT) which have already been impacted by Primary Health Care’s presence in the IVF market. The former has seen its shares fall 2.5% on the news.

What is Primary Health Care paying for Montserrat?

The acquisition of Montserrat is expected to be completed in November with an upfront consideration of $75 million on a cash and debt free basis. A further deferred payment of up to $20 million will also be payable no earlier than July 1 2019, subject to the successful commissioning of the three aforementioned development facilities, and completion of the private hospital acquisition in Western Australia.

Further additional earn‐out payments may be payable at the end of FY 2020 and FY 2021 if Montserrat is achieving certain agreed financial milestones. The total acquisition consideration payable for Montserrat is capped at $138.5 million and it is expected to be accretive from FY 2020.

Finally, as well as announcing this, management reconfirmed its guidance for underlying NPAT in FY 2019 to be at or above $100 million, which is flat on last year’s result.

Should you invest?

While I think that this acquisition has the potential to be a key driver of growth for the company in the future, I still feel it is a little too soon to invest and believe there are other options out there with more compelling risk/rewards. I would class it as a hold at this point.

Instead of Primary Health Care I would be buying one of these blue chip shares which have the wind in their sails.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Monash IVF Group Ltd and Virtus Health Limited. 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 Scott Phillips.

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