Why this small cap soared on a takeover bid

Shares in allied healthcare company Healthia (ASX: HLA) rocketed higher last Thursday when it announced the company had received a takeover bid from private equity company Pacific Equity Partners. Private equity companies are essentially investment companies known for buying up entire businesses, make use of large amounts of debt to finance transactions and juice returns, improve the operations (usually through cost-cutting initiatives) and occasionally combining the business with others that they already own.

As a refresher, Healthia is an allied health business mainly focused on podiatry, physiotherapy, occupational therapy and optometry. It has more than 300 clinics around Australia and has a strategy of acquiring businesses that fit its criteria and growth strategy (this is commonly known as a “roll up” and allows a company listed on the share market to benefit from the difference between the valuations of public and private companies, known as “public-private arbitrage”).

Healthia has experienced rapid growth since its IPO. The FY23 results were released alongside the takeover bid last week, and showed revenue of $252.6 million 26.1% higher year-on-year (YoY) and nearly four times higher than the revenue in FY19. Net profit excluding amortisation more than doubled from $9.2 million in FY22 to $18.9 million in FY23 (the amortisation is simply an accounting issue from business acquisitions, which can quite rightly be ignored in this case). This proves Healthia’s resilience and growth strategy, particularly during the challenging pandemic period.

The Deal

The takeover bid values Healthia at approximately $260 million or $1.80 per share, representing a whopping 84.6% premium to Healthia’s share price at the close on the previous day and an 87.1% premium to the 1-month average price (weighted by volume). Shareholders have the option to take cash, unlisted shares in Harold TopCo Limited, or a combination of the two. Allowing shareholders to take part in the future upside of the business through shares in an unlisted company is relatively rare, but it does happen.

Healthia shares launched more than 78% higher when the bid was announced and still sit at the same $1.74, just 3.3% below the proposed bid. It’s normal for the share price to sit just below the takeover price–the difference accounts for the chance that the bid does not go through for any particular reason (shareholders oppose the merger, the acquirer finds something they don’t like during due diligence or they are unable to secure financing, etc.) and also for the time value of money ($1.80 today is worth more than $1.80 at the time the merger actually closes). Occasionally shares will sit above the bid price, if there is a strong likelihood of a higher bid, either from the original bidder or from a third party.

As indicated by the share price action, investors seem to believe it’s unlikely that we will see a much higher bid here, given the huge premium to the current share price (and the last capital raise) and that it represents more of a financial transaction (rather than a trophy asset or strategic asset that others may want to own too). It also already has the support of 26.8% of the shareholder register (including Regal Funds Management, MA Financial, and Wilson Asset Management), and the support of Healthia’s Board of Directors. Chairman Dr Glen Richards stated:

“The Healthia board has unanimously concluded that the scheme represents a very attractive outcome for our shareholders, clinic partners, patients, clinicians and team members.

In the Healthia boards’ view, the all-cash price at a significant premium to Healthia’s recent share price reflects the inherent value of Healthia’s business operations, national platform and growth strategy in Australia and New Zealand.”

Take the Money and Run?

Healthia’s share price had been struggling prior to the takeover bid, declining nearly 60% since the all-time high reached in December 2021. While it might be tempting to think that companies often get acquired by private equity when they’re struggling (in an effort to improve the operations), Healthia’s business performance since its IPO has been very solid.

Evidently, Pacific Equity Partners believed that the public share market was undervaluing the company and they believe it is worth considerably more to them owning it privately. There might also be specific knowledge, expertise or synergies that Pacific Equity Partners can bring to the table, given that it’s their ninth public-to-private deal and seventh in healthcare. Taking public healthcare companies private certainly seems to be an area of expertise!

In terms of what happens now, investors will be able to vote on the proposal at a meeting scheduled for late November 2023. If approved, it will be implemented shortly thereafter and investors will receive the $1.80 in cash or their preferred combination of cash and shares in Harold TopCo Limited (noting that only 30% of the total purchase price will be paid in shares). Alternatively, there’s always the option to simply take the $1.74 available on the ASX today.

Disclosure ASX:HLA currently owned in TAMIM portfolios.