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Why Ramsay Health Care Limited (ASX:RHC) is making a $1.3 billion bet on Europe

Investors in Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) shares have suffered a tough year with the stock down around 18% over the past 12 months after the hospital operator revealed weaker-than-expected profit growth in financial year 2018.

Also acting as a drag on Ramsay’s share price is the group’s guidance for earnings per share growth “up to 2%” in financial year 2019 that equates to core EBITDA growth of between 4% to 6% according to the group.

Ramsay’s CEO Craig Mcnally attributed the soft guidance to “challenging circumstances” in the UK as the public health service fed less business to Ramsay’s operations in that country, while a lower tariff environment in France also hurt Ramsay’s operations in financial year 2018.

However, it seems Ramsay’s management has not been put off by the tough funding environments in Europe with the group today announcing that it will almost certainly go ahead with its $1.3 billion acquisition of Sweden-based integrated healthcare group Capio AB.

This is after 96% of Capio’s shareholders accepted Ramsay’s subsidiary’s improved offer of SEK (Swedish kroner) 58 per share. The original offer stood at SEK48.5 per share in cash.

Ramsay reports that the deal will be a win for investors as it will be able to extract EUR20 million in synergies (cost savings, etc) from the combined groups within 2-3 years, with core earnings per share accretion expected within 2-3 years.

While Ramsay’s share price has fallen heavily over the past year, over the long term it has been an excellent performer for investors. In fact, it has grown five times in value from a price of around $11 at the start of 2010 to close to $55 today.

The long-term success is because Ramsay has several reasonably reliable growth strategies; including acquisitions (as with Capio AB), brownfield expansions (e.g. developing capacity at existing operations), greenfield expansions (buying land and constructing new operations), partnering with the public sector, and organic growth.

Underpinning all of this growth is a rising demand for healthcare services as populations age and living standards rise.

As such Ramsay is one of a number of successful operators in the healthcare sector that also includes Primary Health Care Limited (ASX: PRY), Medibank Private Ltd (ASX: MPL) and Healthscope Ltd (ASX: HSO).

Investors then shouldn’t write Ramsay off just because its share price has been in reverse for the past 12 months.

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Motley Fool contributor Yulia Mosaleva owns shares in Ramsay Health Care Limited. The Motley Fool Australia has recommended Ramsay Health Care 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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