Healthscope (HSO.ASX) has found itself talk of the town again after it received its second non-binding approach from a consortium led by BGH Capital.

With the bid described by the Healthscope board as “substantially the same”, the discount observed in the share price relative to the offer headline price reflects a market uncertain about whether the transaction will complete under the existing terms.

Does it stack up?

So how does the bid stack up, and why has BGH felt confident enough to submit an offer substantially similar to the one that was knocked back by the Healthscope board only a few months ago?

The initial bid itself is non-binding, and drawing similarities to our commentary on the recently announced MYOB Group Limited (MYO.ASX) transaction, initial proposals of this nature generally favour the bidder over the target and its shareholders.

A key differentiator this time around is that this is BGH’s second approach and goes some way to establishing its intent beyond a bit of tyre kicking. With AustralianSuper once again coming along for the ride, major shareholder Ellerston Capital has indicated that it would be supportive of BGH’s proposal at the indicative price of $2.36. A significant portion of the register is now angling for Healthscope’s board to allow BGH due diligence, and will likely not be so easy to bat away this time.

In the months after denying both BGH and Brookfield due diligence after the first round of approaches, the HSO share price has come under pressure through a combination of challenging market conditions and the dissipation of a corporate activity premium.

The imminent launch of the new Northern Beaches hospital in a period of particularly weak hospital volumes, the as yet incomplete search for a co-investor in a mooted unlisted property trust divestment, and an upcoming annual meeting that includes voting on the re-election of directors has put the board under substantially more pressure to engage BGH second time around.

BGH seem keen to secure the company, and while it does appear to be a low point in its earnings cycle, we think BGH will at the very least be afforded the chance to conduct due diligence.

The deal structure is somewhat unique (the similar proposal for Navitas (NVT.ASX) by the same consortium not-withstanding) in that AustralianSuper have agreed to accept BGH’s offer regardless of whether a superior offer is on the table or not.

This puts BGH at a distinct advantage ahead of any competition in that it wields enough control to make life difficult for another competing party. We would normally consider a reduced potential for a competing proposal in a situation like this, however, the BGH/AustralianSuper arrangement did not previously prevent Brookfield from throwing its hat in the ring at a conditional price of $2.50 per share; a considerable premium to Healthscope’s recent low of $1.80.

As always, we remain wary of non-binding, conditional, indicative proposals, particularly from private equity bidders, and this situation is no different.

The increased conditionality of the proposal surrounding the group’s earning guidance means that we are not buyers around these levels, however, we will be monitoring the situation closely should the price fall and a more favourable risk vs. reward scenario presents itself.

Carlos Cobelas

this is the sort of short term attitude that drives me crazy about Australian investors. private hospitals are virtually essential infrastructure assets that are extremely difficult to replace and should be thought of as a LONG term investment. not a sell out just because they are offering a premium to the share price, that should be much higher in 10 years to come. good grief.

Luke Cummings

Hi Carlos, Thank you for taking the time to offer your thoughts. The first point I think should be necessary to make is that we’re not passing judgement on who should or shouldn't own Healthscope (or any other companies for that matter). We manage a market neutral fund that specialises in trading 'events' (including M&A) and hence our analysis of the situation is based solely on the likelihood of the current offer succeeding and/or the likelihood of the offer terms being improved. For this reason, we are very much focused on the ‘short term’ and whilst we appreciate this approach is not for everyone, it has generally served our investors well. In the case of Healthscope specifically, we would note that the transfer of ownership does not necessarily mean that the underlying assets disappear, evidenced by the fact that Healthscope had been previously owned by private equity before returning to public markets in 2014. The inclusion of Australian Super in the bidding consortium (who would most likely have a very long-term investment horizon) indicates to us that BGH are very much taking a view to the long term with their offer. Of course, at this stage the BGH/Australian Super consortium are yet to even be granted due diligence access, let alone make a binding offer so, the situation has some way to play out yet. Luke