By Maano Andy Thovhakale
26 May 2022, a consortium comprising Remgro and MSC Mediterranean Shipping SA made a proposal to the board of Mediclinic regarding a possible cash offer for the issued and to be issued share capital of Mediclinic not already owned by Remgro. Remgro owns 44.6% of Mediclinic.
30 May 2022, Mediclinic’s board unanimously rejected the 463 pence per Mediclinic share offer made by Remgro and MSC because the offer undervalued Mediclinic.
Mediclinic’s business consists of the provision of comprehensive, high-quality hospital services on a cost effective basis in Southern Africa, the United Arab Emirates, Switzerland and the United Kingdom.
Of the numerous acquisitions Mediclinic has made over the years, the move to expand operations by establishing and acquiring a 50% stake in emergency assistance services, ER24 in 1999 and acquired the remaining 50% in 2005 is one of the best “complimentary” acquisitions I have ever seen.
07 August 2022, a revised offer was announced. The £3.7bn (R74.8bn) cash offer made by a Remgro-led consortium for Mediclinic was accepted. This was revised from the initial £3.41bn cash offer.
The independent Mediclinic directors, advised by Morgan Stanley and UBS as to the financial terms of the acquisition, consider the terms of the acquisition to be fair and reasonable. In providing their advice to the independent Mediclinic directors, Morgan Stanley and UBS have taken into account the commercial assessments of the independent Mediclinic directors.
The offer of 463 pence per Mediclinic share was pumped up by 9% to 504 pence per Mediclinic share at an implied enterprise value multiple of 11.2x Mediclinic’s reported adjusted EBITDA of £522 million for the year ended 31 March 2022.
As at 31 Mar 2022, the net asset value of the Mediclinic Group amounted to £3,107 million as at and the earnings and headline earnings of the Group and its operations were £151 million and £140 million, respectively. The value of the net assets that are the subject of Remgro’s acquisition is approximately £169 million and the earnings and headline earnings attributable to these net assets are approximately £8.2 million and £7.6 million, respectively.
Who forms part of the Remgro-led consortium?
Bidco Remgro and MSC (acting through its wholly-owned subsidiary SAS Shipping Agencies Services) are joint offerors with respect to the acquisition.
Following completion of the acquisition, Bidco will be owned in the following proportions:
- Remgro will own 50% of Bidco, and
- SAS will own 50%. of Bidco. SAS is a private limited company registered in Luxembourg and is an indirect, wholly owned subsidiary of MSC. SAS holds the MSC group’s agencies network, container terminals and logistics businesses.
Remgro, SAS and Bidco have entered into a subscription and rollover agreement, pursuant to which Remgro has agreed to sell its existing 44.56% stake inn Mediclinic to Bidco in exchange for shares in Bidco. In a nutshell, Remgro will exchange its existing 44.56% stake in Mediclinic for an equivalent interest in Bidco and subscribe for further shares in Bidco for £201 million.
Bidco has not traded since incorporation, nor has it entered into any obligations, other than in connection with the offer and financing of the acquisition.
The cash consideration payable to the shareholders of Medclinic will be financed by equity to be invested in Bidco by Remgro and SAS from their existing resources. Nomura, acting as financial adviser to the consortium, is satisfied that sufficient resources are available to Bidco to enable it to satisfy in full the cash consideration payable to the shareholders of Medclinic.
What makes Nomura, acting as financial adviser to the consortium, be satisfied that sufficient resources are available to Bidco to enable it to satisfy in full the cash consideration payable to the shareholders of Medclinic?
Johann Rupert led companies always hold serious cash. Here’s an example: At 31 Mar 2021, Richemont’s net cash position stood at €3,4bn (R59bn) vs €2,4bn in 2020.
As at 31 December 2021, Remgro had a total cash at the centre of R8.7bn. Approximately 45% (R3.9bn) of the available cash at the centre was invested in money market funds which are not classified as cash and cash equivalents on the statement of financial position.
The purpose of establishing a consortium is to provide for Bidco to become the holder of the entire issued and to be issued ordinary share capital of Mediclinic not already directly or indirectly owned by the Relevant Remgro Subsidiaries.
The consortium has a high regard for Mediclinic’s existing operations and wants to support Mediclinic’s management team in its stated ambition to grow the business in both existing and new geographies.
The consortium has no plans to make any material restructurings or change in the locations of Mediclinic’s business nor to change the location or functions of the Mediclinic headquarters. The consortium does not intend to redeploy the fixed assets of Mediclinic. Furthermore, the consortium has no intention to make any changes to Mediclinic’s research and development functions.
It is intended that Mediclinic shall make an application for the cancellation of trading of the Mediclinic shares on the London Stock Exchange’s main market for listed securities, the Johannesburg Stock Exchange and the Namibian Stock Exchange and for the cancellation of the listing of Mediclinic Shares on the Official List of the London Stock Exchange, the Johannesburg Stock Exchange and the Namibian Stock Exchange.
The JSE is bleeding companies
In 1999 the JSE had 811 companies listed on the main board. It now has 288 companies listed on the Main Board, including 62 foreign domiciled companies.
25 companies delisted from the main board in 2021 vs 20 in 2020 were largely the result of mergers and acquisitions, and schemes of arrangement in mostly small to mid-sized counters.
Remgro is known to invests in businesses that can deliver superior earnings, cash flow generation and dividends over the long term.
Remgro has a strategy of owning assets via various platform investments.
Here’s an example of that strategy. In 2015, Remgro acquired a 29% stake of Spire Healthcare from Cinven, a European PE firm, for £431.7million.
That wasn’t the end of the transaction.
Mediclinic then in turn acquired the Spire holding (29%) from Remgro for R8.6bn being the aggregate of purchase price, transaction & funding costs.
How did Mediclinic fund the R8.6bn? It did a fully underwritten, renounceable rights issue to qualifying Mediclinic shareholders. The rights issue raised R10bn.
Mediclinic used the proceeds of the rights issue to fund the Spire acquisition of R8.6bn from Remgro.
The balance of R1.4bn was retained by Mediclinic for the rights issue and advisor costs and to support future growth opportunities.
Remgro held 42% of Mediclinic at the time of the acquisition of Spire committed to follow all their rights and agreed to underwrite the balance of the proposed Mediclinic rights issue and increased its stake to 42.5%.
What does Remgro seek to achieve by buying up Mediclinic?
Remgro, like many other holding companies have been fighting a battle to close the valuation gap.
Remgro’s shares have traded at about a 35% discount to its intrinsic net asset value for years. As at 31 Dec 2021, the percentage discount to intrinsic net asset value was 35.2%.
Trading at a discount to the sum-of-the-parts is common for holding companies.
Trading at a discount to net asset value refers to a situation where shares of a company are trading at a price lower than the company’s net asset value per share. This means that the value of its assets is higher than the market value of the company itself.
When an entity trades at discount to its sum-of-the-parts, it means that if investors were to hold individual positions in the holding company’s underlying assets, they would be worth more than holding shares in parent that owns those assets.
What ‘complicates’ things with holding companies that have unlisted investments is the difficulty in valuing those unlisted investments (lack of proper disclosure). Valuing listed investments within holding companies is often easier than valuing unlisted investments.
For Remgro, the intrinsic net asset value is one of the measures used to assess shareholder value created. Investee companies, which represent operating segments, are valued and included in the intrinsic net asset value. Remgro further measures its performance in terms of the increase in its intrinsic net asset value. This measures the growth in the value of the various underlying investee companies, measured by listed market value or, in the case of unlisted investments, applying the principles of IFRS 13: Fair Value Measurement.
Remgro’s strategy includes unlocking value for its shareholders on top of narrowing the valuation gap between its share price and net asset value.
Remgro’s ability to identify opportunities to unlock value for its shareholders at the right time is second to none on the JSE. Here’s an example of some value unlocks in recent years:
- During November 2008, Remgro unbundled its investment in BAT to its shareholders by way of an interim dividend in specie amounting to R55.2 billion. Following the BAT unbundling the Group’s remaining interests consisted mainly of investments in banking and financial services, printing and packaging, motor components, glass products, medical services, mining, petroleum products, food, wine and spirits and various other trade mark products. At 30 June 2021, the value of the unbundled BAT shares has increased to R115.4 billion.
- During June 2020, Remgro unbundled its 28.2% investment in RMB Holdings Limited to its shareholders by way of an interim dividend in specie amounting to R23.9 billion.
- During May 2021 Remgro sold 40 000 000 FirstRand Limited shares through an accelerated book build offering for a gross consideration of R2.040bn (or R51.00 per share). The transaction reduced Remgro’s interest in FirstRand to 3.3% from 40% in 2020. The FirstRand group has the following portfolio of integrated financial services businesses comprising FNB, RMB, Aldermore, MotoNovo, Ashburton Investments, Motovantage and FCC.
Remgro has also paid some handsome dividends over the years:
Is there any value that Remgro will extract from Medclinic?
The demand for healthcare services continues to grow more so with an ageing population. By 2030, the number of people aged over 65 will be more than 1 billion, or 13% of the total population
The global healthcare provider network management market was valued at $48bn in 2016 and is projected to reach $302bn by 2025, growing at a compound annual growth rate (‘CAGR’) of 23% from 2017 to 2025.
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