The hospital operator has sold its UK diagnostic business Alliance Medical to Icon Infrastructure for just more than R21bn. The price tag is a meagre return on the R14bn-plus Life Healthcare paid in 2016 for Alliance Medical, which provides imaging services across Europe. The sale will hurt the R30bn private healthcare group in the long run.
Sure, shareholders, who have been pushing for the sale since February, will argue that the transaction will allow Life Healthcare to sharpen its focus on its core domestic market and reduce debt. They will contend that the transaction will boost shareholder returns as the company will hand most of the proceeds to investors. They may also point out that shares in Life Healthcare have risen by almost a fifth since it first flagged the potential deal.
It is also true that the underlying value of Alliance Medical was not fully reflected in the share price, an unpopular mispricing of company assets that often leads to either a spin-off or the sale of assets. These arguments are not without merit.
But did Life Healthcare do enough to communicate with investors and analysts, and provide greater transparency and clarity about its strategy, performance and valuation? Wouldn’t this also help to narrow the valuation gap by clearing up any doubts or confusion about the company’s value and prospects, and boosting market confidence? These are not trivial questions. They strike at the core of the mispricing of assets plaguing many publicly traded companies at home and abroad.
The transaction will substantially reduce Life Healthcare’s geographic diversification and expose it to more risks at home, where it faces challenges such as regulatory uncertainty and a low-growth economy consistently tossing medical-insured middle-class households into poverty.
The UK business provided a hedge against currency fluctuations and a source of stable cash flow. A cursory glance at Life Healthcare’s latest annual report is exhibit A of the sound strategic place of the UK business in its portfolio: the UK segment accounted for almost 30% of the company’s annual sales and its core profit, or earnings before interest, taxes, depreciation and amortisation (ebitda) in 2022. It also had a higher ebitda margin than the SA business, at roughly 20% versus just more than 12%. By selling the UK business, Life Healthcare is giving up a significant and profitable part of its portfolio.
The sale is driven by shareholder pressure for short-term gain and does not reflect the long-term strategic vision of Life Healthcare. The company could have invested more in the UK business to improve its profitability and resilience, rather than selling it at a bargain and returning most of the money to shareholders.
“Our shareholder base was really saying to us that Icon will be a better player to hold the asset because they can take their time and look for longer date returns,” CEO Peter Wharton-Hood told investment banker Rand Merchant Bank in a podcast last week.
However, this may not be the best decision for the group’s future growth. The UK business had a strong market position and growth potential in Europe as it was the largest independent provider of imaging services in the UK and had contracts with public and private healthcare providers in the UK. It also had an opportunity to expand into new areas such as molecular imaging and oncology. By offloading this business, Life Healthcare is losing an asset that could have given it an edge over its competitors.
The deal is a loss for Life Healthcare. At the R21.3bn price, the deal implies an enterprise value to ebitda (EV/ebitda) multiple of just more than 12 times, much less than the nearly 18 times average in the health and pharmaceutical sector in Europe, according to Hamburg-based data and business intelligence portal Statista.
Life Healthcare is not alone in caving into shareholder pressure in pursuit of short-term returns. PSG Group faced investor rebellion over the mispricing of its assets, forcing it to spin off its stake in Capitec and hoping it would solve the problem. It did not. The deal, which created more than R20bn in shareholder value and robbed PSG of a steady dividend flow to invest in up-and-coming businesses, failed to achieve its primary purpose.
In the end, PSG became the latest company to leave the JSE, meaning there is less and less for portfolio managers to choose from to guard prudently against risk. As we have written before, a shrivelled stock market also matters for the wider economy as it limits options for companies to raise capital for expansion. The list of companies — some rightly so — facing this shareholder pressure is long: from Remgro to Naspers and African Rainbow Capital to Sabvest.
Life Healthcare’s UK exit is a healthy move for neither the group nor its shareholders. It is a shortsighted move that will reduce its diversification, profitability and growth potential. It will deprive the group of a strategic asset that could have helped it achieve its vision of becoming a leading international healthcare provider.
• Motsoeneng is Business Day deputy editor.
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