The Ramsay Health Care Limited (ASX: RHC) share price was out of form on Thursday.
The private hospital operator’s shares fell 3.5% to $62.30.
Why did the Ramsay share price tumble?
The Ramsay share price came under pressure on Thursday after the market responded cautiously to the announcement of a new acquisition.
After the market close on Wednesday, Ramsay announced that it had made an offer of 1 billion pounds (A$1,822 million) to acquire 100% of Spire Healthcare. It is a London Stock Exchange-listed independent hospital group in the United Kingdom with a focus on the private patient market. It is also a leading provider of high-acuity care.
The Spire Board is unanimously recommending its shareholders vote in favour of the scheme. It also notes that major shareholders and directors, accounting for 30.4% of its shares, have made irrevocable undertakings to vote in its favour.
Management believes the acquisition will be transformational for Ramsay’s UK business. It also expects to deliver benefits of at least 26 million pounds per annum from procurement savings, improved capacity utilisation, and cessation of UK listing costs. This is forecast to result in high single digit earnings per share accretion in FY 2024.
What was the response?
One leading broker that gave the acquisition a lukewarm response was Citi. In response to the news, the broker has held firm with its neutral rating and $67.00 price target.
Citi notes that the deal will increase its market share in the UK to 25% and is expected to generate decent synergies. However, the broker has some doubts over whether those synergies will be realised.
Commenting on the acquisition, Citi said: “Guiding to high single digit EPS accretion in FY24 Ramsay Healthcare has announced that it has bid 240p per share for Spire Healthcare Group, a 24% premium to the last close in an agreed deal. This values the equity of Spire at ~£1bn (A$1.822bn) and the EV post AASB16 at £2.064bn.”
“The combined group would have ~25% of the UK private hospital market, with Spire currently having ~17% market share (~£1bn revenue in CY19) and RHC ~8% market share (~£540m revenue in FY19).”
“In CY19, Spire reported EBIT of £98m and RHC said its CY19 (pre-exceptional items) EBIT was £42m (but reported £26m in FY19). The company is forecasting “at least” £26m in synergies for the combined group, which seems reasonable on a combined revenue of ~£1.5b, although when Ramsay acquired Capio it made similar statements, and it is not obvious that those synergies have been realised (although in a different market).”