Sanlam slumped to an almost two-year low on Tuesday after the insurance and investment giant offered to buy a controlling stake in AfroCentric, the owner of medical scheme administrator Medscheme.
Shares in Africa’s biggest nonbank financial services group fell as much as 4.5% to R47.94, the lowest since November 4 2020, before paring losses to end 3.17% weaker at R48.92.
AfroCentric shares surged the most in two years on Sanlam’s offer to purchase no less than 36.9% and as much as 43.9% of AfroCentric for R6 a share. The offer represents a premium of 55.8% to AfroCentric’s closing price on the JSE on October 7.
The investment holding company’s shares, which are fairly illiquid, rallied as much as 31.3% to R5.50, the steepest intraday jump since June 24 2020, before paring gains to end 21.72% ahead at R5.10.
“The market is being a bit harsh on Sanlam, which suggests the prevailing sentiment is that they are overpaying for AfroCentric,” said Wayne McCurrie of FNB Wealth and Investments.
“Sanlam’s rationale is quite sound because it will bolster their presence in a market segment where they don’t have much exposure.”
Motivation
If the proposed transaction proceeds, Sanlam will hold a majority of 55%-60% of AfroCentric’s shares, with the final shareholding dependent on the percentage of AfroCentric shareholders that accept its offer.
Sanlam said its motivation for the offer was that customers need reliable and affordable health care, and that it intends expanding its product offering to include medical aid, health insurance and administration.
“I don’t think Sanlam should be down this much but it could be that the market is thinking there will need to be a significant capital outlay to really expand the medical aid and health insurance offering,” McCurrie said. “But I can understand why AfroCentric is up so much because if they become part of Sanlam they don’t need to raise capital.”
Sanlam’s offer will allow shareholders of the small-cap investment holding company to choose either cash or Sanlam shares. If the deal goes ahead, Sanlam will transfer its stake in ACT Healthcare Assets to AfroCentric in exchange for the same interest in AfroCentric.
Sanlam’s relationship with AfroCentric dates back to 2015, when it embarked on a strategic venture in the healthcare sector by opting to partner with the majority black-owned company, which operates in SA, Botswana, Mauritius and Namibia. The partnership saw Sanlam acquire a 28.7% share in ACT Healthcare Assets, which controls AfroCentric entities including the Medscheme medical scheme administration business and pharma businesses Pharmacy Direct and Activo. That stake is held through Sanlam Life Insurance, with AfroCentric holding the remaining 71.3%.
Valuation
“AfroCentric is a leading diversified and integrated healthcare provider that provides services to 3.8-million members,” Sanlam CEO Paul Hanratty said.
“They have an unwavering focus on providing excellent service at affordable price points to SA consumers, which makes them an attractive addition to Sanlam’s stable of offerings.”
AfroCentric, whose market valuation jumped to R2.4bn after Sanlam’s buyout offer, said in September that medical scheme membership was stagnant and that far more urgency is needed to change laws to allow for lower-cost alternatives.
The medical scheme industry has for years wanted to introduce lower-cost options for employed individuals who are not insured, but has been prevented from doing so by regulations that stipulate a base level of cover that costs at least R1,000 a month.
Framework
It has been more than seven years since the medical aid regulator, the Council for Medical Schemes, began to develop a legal framework to enable medical schemes to offer low-cost benefit options exempt from providing the full, costly suite of benefits stipulated by legislation.
AfroCentric CEO Ahmed Banderker said that while Sanlam’s offer remains subject to shareholder and regulatory approval, he believes it will be a positive move forward for the group.
Note: October 12 2022
This story has been updated with final closing prices using Bloomberg data.
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