An Increased Offer Is To Be Expected For Healius

Summary

• Jangho Group made a bid for Healius, which was quickly rejected.
• There is a possibility of Jangho increasing the price.
• HLS is currently in a turnaround situation, so even if there won't be any sweetened offer, we can expect the share price to rise.

Current price: A$2.9

Rejected offer: A$3.25

Upside: 11%+

This is a quick write up about a potentially interesting situation in Australia.

Australian healthcare company Healius (OTC:PHCRF) (previously - Primary Health Care) has received a takeover offer priced at A$3.25/share from their largest shareholder (holds 16%) Chinese curtain wall maker Jangho Group (601886.SS). In only 4 days it was rejected and called “opportunistic and undervaluing.” The potential play here is that Jangho, which is currently diversifying into the Australian and Chinese healthcare sector, will raise the bid; however, even if that does not happen, Healius is currently in a turnaround situation and the recent + planned investments might lift the share price as well.

The offer is priced at a 33% premium to the last closing price (before the offer announcement) and a 30% premium to the equity raise in August at a price of A$2.5/share; however, as commented by the Healius, it is “highly conditional and uncertain.”

The buyer

Jangho Group is a China-based company (market cap = $1.3bn), whose main business is the construction of curtain walls and interior decoration. Since 2015, the company is diversifying into Chinese and Australian healthcare sectors:

• In 2015, acquired Australia's largest eye chain hospital Vision Eye for A$200m at a 20% premium to last closing price. It took 5 months to complete the deal.

• In 2016, became the largest shareholder in Primary Health Care (currently - Healius) by acquiring an 11.7% stake and increased it later on.

• In November 2016, acquired a controlling stake at Chinese Zeming Eye Hospital Management.

So far, Jangho has used the expertise of Australian Vision to expand and develop their ophthalmology business in China, so most likely the same story will be repeated with HLS.

Healius

Until December 2018, the company was called Primary Health Care. It runs 52 medical centres (18.4% of the revenues) and also involved in the imaging business (21.2%), but the main segment is the pathology division (62.7%), which provides medical laboratory and pathology services.

Apparently, the company runs on a very outdated business model and system, as commented by the CEO: "I would say we had a market leading model in the late 90s and early 2000s in terms of its efficiency. It clearly delivered a service that people wanted… but we didn't change it."... “we can’t assume that the model that worked in the 1990s will continue to work into 2020 and beyond.” So Healius did a complete business review, then turned to the market and conducted an A$250m equity raise at an A$2.5/share price, which is planned to be used in three parts:

• To modernize the hospitals and increase their operational capacity

• Upgrade the pathology division by replacing a 25-year old Laboratory Information System with a new integrated one.

• The company has already completed the acquisition of 7 Montserrat hospitals with a total consideration of A$140m, upfront payment A$75m and further additional earn‐out payments, which may be payable at the end of FY 2020 and FY 2021, depending on Montserrat achieving certain agreed financial milestones.

The investments are expected to return the company to profit growth in 2020, according to the CEO.

Other points to consider:

• I am actually not so certain about the buyer. Why would a Chinese curtain maker diversify into the Australian healthcare market, not to mention pathology sector. However, as described above, they already own certain assets and are the largest holder in HLS, which kind of allows to think that their intentions are serious.

• The proposal was rejected very quickly, which shows that management definitely values HLS way higher than the offered price. It is in a turnaround situation however, it is interesting that most (A$140m) of the collected money in the recent equity raise will go to improve the hospital segment, which is the smallest share of HLS revenues.

• Healius has described the proposal as highly conditional and uncertain. No funding was yet secured and the approvals from the Chinese and Australian governments would be required, which apparently increased the management's doubts about the offer. Although, in a week later written statement, Jangho appeared to be confident about the ability to raise the funds, the regulatory approval side does not seem so pleasant as the Foreign Investment Review Board has recently stated that they don't believe anymore that private Chinese companies (such as Jangho) are independent from the leading communist party control, therefore, all such takeovers will be screened more strictly on national security grounds.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.