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U.K. Health Shakeup Seen Spurring Ramsay’s Biggest Bid: Real M&A

The NHS is the U.K.’s second-biggest buyer of private health care, and the number of NHS patients treated in private facilities has more than doubled in the past four years, the Office of Fair Trading said. Photographer: Christopher Furlong/Getty Images
The NHS is the U.K.’s second-biggest buyer of private health care, and the number of NHS patients treated in private facilities has more than doubled in the past four years, the Office of Fair Trading said. Photographer: Christopher Furlong/Getty Images

Nov. 28 (Bloomberg) -- The biggest shakeup in the history of Britain’s state-run health service is poised to entice Australia’s Ramsay Health Care Ltd. to pursue its largest deal.

Ramsay, based in Sydney, faces slowing profit growth as it runs out of room to expand in Australia. The private hospital operator more than doubled net income in the past three years, making it the fastest growing health-care provider valued at $1 billion or more in the developed Asia-Pacific region, according to data compiled by Bloomberg. Now, analysts expect earnings to rise no more than 13 percent in each of the next three years.

As the U.K.’s National Health Service refers more patients to private providers in an effort to cut costs, Ramsay may look to that market to bolster earnings, said Wilson HTM Investment Group Ltd. While U.K. hospitals generate the company’s highest profit margins, the unit only accounts for 14 percent of sales. London-based Spire Healthcare Ltd., which may fetch $1.9 billion in a takeover, and BMI Healthcare Ltd. are both potential targets, said Deutsche Bank AG. That would surpass Ramsay’s top deal -- the $1.1 billion purchase of Affinity Health Ltd.

“They have capacity to do a sizable acquisition,” Derek Jellinek, an analyst at CIMB Group Holdings Bhd. in Sydney, said in a phone interview. “It’s just a matter of time. The growth has been so strong for so long that they need ‘ex-Oz’ growth to support what has become, as a business, a sizable entity.”

Carmel Monaghan, a Brisbane-based spokeswoman for Ramsay, declined to comment beyond the company’s annual report.

Psychiatric Facility

“Our U.K. business is well-placed to capture future growth in NHS volumes,” Ramsay said in the report, released last month. “While we are interested in expanding in the U.K. given our success in this country, we will only progress opportunities that meet our investment criteria.”

Formed in 1964 when Paul Ramsay converted a guest house in northern Sydney into a 16-bed psychiatric facility, the company now has a market value of A$5.27 billion ($5.5 billion) and runs 116 hospitals and clinics in Australia, Indonesia, France and the U.K.

Profit rose to A$244.1 million in fiscal 2012 from A$106.5 million in the year ended June 2009, according to data compiled by Bloomberg. The 129 percent increase is the most of any health-care services provider in the developed Asia-Pacific region with a market value surpassing $1 billion, the data show.

Budget Cuts

Ramsay, which has run hospitals in the U.K. since its 2007 acquisition of Capio AB’s hospitals in England, has room to borrow for a takeover, said David Low, an analyst at Deutsche Bank in Sydney. The company’s net debt-to-equity ratio, a measure of indebtedness, has fallen by more than half since June 2009, data compiled by Bloomberg show.

“Now is the time to be looking,” Low said. “They’ve got the balance sheet. Opportunities in Australia are limited. The NHS is under pressure. They will increasingly rely on the private sector to provide services.”

Ramsay today rose as much as 1.6 percent, before closing up 0.9 percent at a record A$26.31 in Sydney. The benchmark S&P/ASX 200 index fell 0.2 percent.

Founded in 1948 to provide health care to the entire U.K. population, the NHS is now aiming to reduce annual costs by as much as 20 billion pounds ($32 billion) by 2015, almost one-fifth of its expected budget that year, according to the Department of Health. Under the Health and Social Care Act, passed into law this year, health workers and layers of administration are being cut, and NHS physicians are being given more power to send patients to private providers -- at the government’s expense.

Most Profitable

Already, patients referred by the NHS to Ramsay-run U.K. hospitals rose 11 percent in the 12 months ended June, swelling the proportion of those admissions to more than 65 percent of Ramsay’s U.K. total. That was up from 44 percent in the year ended June 2009, according to Ramsay filings.

The U.K. business generated an operating margin, before rent, of 25 percent in the latest 12-month period, Ramsay said. Australia and three hospitals in Indonesia still accounted for 74 percent of earnings before interest, taxes, depreciation, amortization and rent. The company had an overall Ebitda margin of 15 percent.

“It does make sense for them to replicate what they have,” said Shane Storey, an analyst at Wilson HTM in Brisbane. “Good facilities attract good surgeons. Good surgeons get good outcomes. Good outcomes mean patients are out of hospital faster. That improves profitability.”

Ramsay ranked No. 5 among private health-care providers in the U.K. with an 8.8 percent share of the market in 2010, the country’s Office of Fair Trading said in a report in April 2012. General Healthcare Group, owner of BMI, was first with 24 percent and Spire ranked second with 18 percent of the market.

Rising Referrals

The NHS is the U.K.’s second-biggest buyer of private health care, and the number of NHS patients treated in private facilities has more than doubled in the past four years, the Office of Fair Trading said.

This business is making up for a stagnant market for private health care in the U.K., which exited a double-dip recession in the third quarter, according to CIMB’s Jellinek. While private patients pay higher fees, referrals from the state-funded NHS, which pays private providers such as Ramsay for treatment, are increasing at a sufficient pace to compensate for lower profitability, said Jellinek.

The most logical target for Ramsay is Spire, which is owned by private-equity firm Cinven Ltd., according to Deutsche Bank’s Low. BMI, the U.K.’s largest private hospital group, is also a possible target, though less likely, he said.

Largest Deal

If Ramsay paid 1.2 billion pounds, or about 9 times Spire’s Ebitda, the acquisition would boost fiscal 2015 earnings per share by 12 percent, Low wrote in a Nov. 8 report.

That depends on Ramsay leaving the hospital properties themselves with Cinven and extracting cost savings, Low wrote.

Vanessa Maydon, a spokeswoman for Cinven in London, said the firm doesn’t comment on speculation. Zoe Horwich, a spokeswoman for BMI in London, had no comment on any potential bid for the hospital operator by Ramsay.

Spire, bought by Cinven in 2007 for 1.58 billion pounds, runs 37 hospitals and nine clinics and generated sales of 674 million pounds in 2011, according to Cinven. BMI runs 69 U.K. hospitals and treatment sites, its website says.

A takeover of Spire would be Ramsay’s largest. It has spent $1.81 billion on 10 purchases since 2001, data compiled by Bloomberg show. The biggest was the $1.1 billion takeover in 2005 of Affinity Health in Australia, the data show.

Still, there’s no guarantee referrals will continue to be directed to private health-care providers under new U.K. law, said Piers Ricketts, a London-based health-care partner at KPMG.

“This in theory will bring considerable opportunities for the private sector, but in practice you’d have to be bold to bet on massive growth,” he said in a phone interview. “Spire would be a bridgehead, but a very expensive way of acquiring additional capacity.”

Competition Report

Ramsay would find an advantage in the strong Australian dollar, which is up 53 percent against the pound since November 2007, when Ramsay bought Capio’s English hospitals, said David Stanton, an analyst at Nomura Holdings Inc. in Sydney.

“The Aussie is strong and you need critical mass in a new geography to derive synergies,” he said in a phone interview. “That’s why they’re looking.”

Ramsay may also find an opportunity to strike a deal while the U.K. Competition Commission investigates the local private health-care market, said Deutsche Bank’s Low. With a provisional ruling due by June and a final report expected by March 2014, Ramsay may be able to buy assets at a discount with little chance of being undermined by the final report, he said.

“I wouldn’t see it as an extraordinary risk if they went down that path,” he said. “They might move now in the hope of extracting a better price.”

To contact the reporter on this story: Angus Whitley in Sydney at

To contact the editor responsible for this story: Sarah Rabil at

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