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By Gareth Armstrong and Jessica Spira*
Undoubtedly one of the key M&A themes in 2015 was offshore expansion as local companies looked for geographic diversification and foreign currency earnings. Given the relatively small size of South Africa in the context of the global economy, together with the headwinds resulting from the slowdown in the local economy, management teams and investors alike are looking to international markets to further their growth ambitions. The year saw Steinhoff International migrate its primary listing to Frankfurt with a secondary listing on the JSE, The Foschini Group acquire UK-based, multi-channel retailer Phase Eight as well as Brait’s acquisitions of fashion retailer New Look and the Virgin Active Group in the United Kingdom and increased stake in frozen foods supermarket chain Iceland Foods, amongst others.
While already having substantial firmly-established offshore operations in Switzerland, through the Hirslanden group of hospitals, and its United Arab Emirates (UAE) hospital group, Mediclinic continued its international expansion and embarked on a series of transformational transactions in 2015. These will see Mediclinic move from a R100bn JSE-listed South African company to the third largest non-US private hospital group globally with a primary listing on the LSE and secondary listing on the JSE. The first transaction, in August 2015, saw Mediclinic conclude a £432m (R8.4bn) acquisition of a 29.9% stake in LSE-listed Spire Healthcare Group plc followed by the £1.35bn (R31bn) reverse take-over of LSE-listed Al Noor Hospitals Group plc (expected completion is end of February 2016). The group will be renamed Mediclinic International plc and while primary listed on the LSE, its management team will remain in Stellenbosch.
Spire Healthcare is a leading private healthcare group, with a national network of 39 hospitals across the United Kingdom. It delivers tailored, personalised care to over 260,000 in-patients and day-case patients per year, funded through private medical insurance, self-payment and National Health Service referrals. Spire Healthcare is listed on the LSE and has a market capitalisation of approximately £1.2bn (R28bn).
In June 2015, Mediclinic and Remgro announced the terms by which Remgro would acquire 119,923,335 Spire Healthcare shares from funds managed by Cinven, a European private equity firm, at a price of £3.60 per share for a total purchase consideration of £431.7m (R8.4bn) to secure a 29.9% stake in Spire Healthcare.
Due to the narrow window of opportunity to acquire the stake in Spire Healthcare, and as a result of Remgro’s ability to quickly put in place the necessary funding and obtain exchange control approval, it effectively warehoused the stake in Spire Healthcare on behalf of Mediclinic until such time as Mediclinic completed its R10bn rights issue to pay for the shares in the UK healthcare provider. The transaction also involved re-organising Remgro’s healthcare assets under a defined healthcare portfolio enabling Remgro to substantially grow this platform and enhance returns via geographic diversification. Remgro financed the transaction through its own cash resources and bridge finance.
In August 2015, Mediclinic announced the successful completion of its fully underwritten, renounceable rights issue to qualifying Mediclinic shareholders at R90 per share to raise an aggregate amount of R10bn, the proceeds of which were used to acquire the 29.9% stake in Spire Healthcare from Remgro.
In addition to investing in a growing developed market, the acquisition of a stake in Spire Healthcare provides Mediclinic with a further opportunity to diversify into an attractive new geography through a well invested and scalable platform that is positioned to benefit from the long-term structural growth drivers in the UK healthcare market. Both Mediclinic and Spire Healthcare will benefit from mutual collaboration, with the potential to unlock procurement benefits and knowledge transfer.
Al Noor is the largest private integrated healthcare provider in the Emirate of Abu Dhabi with a growing presence in the other Emirates and Oman. The group currently operates through a network of three hospitals with 306 beds, 21 free-standing medical centres and an oncology centre serving as a platform for the company-wide oncology service line. Al Noor employs a highly-skilled workforce of more than 4,000 employees including 684 physicians.
In October 2015, Mediclinic and Al Noor jointly announced the terms by which they had agreed to combine their respective businesses. The transaction is to be implemented by Al Noor acquiring Mediclinic pursuant to a South African scheme of arrangement, under which Mediclinic shareholders will receive 0.62500 new Al Noor shares for each Mediclinic share held. Al Noor shareholders will receive a special dividend of £3.28 per Al Noor share and have the opportunity to tender their shares to Al Noor for cancellation for a cash payment of £8.32 per Al Noor share (subject to scale back).
Following implementation, Mediclinic shareholders will own between 84% to 93% of the combined business, depending on take-up by existing Al Noor shareholders under the tender offer and before the subscription by Remgro for new Al Noor shares to part-fund the tender offer. Given the relative sizes of Al Noor and Mediclinic, the transaction is classified as a reverse takeover of Al Noor under the Listing Rules of the UK Financial Conduct Authority.
The cash payments to existing Al Noor shareholders in respect of the special dividend and tender offer will be funded through a subscription by Remgro, or its wholly-owned subsidiary to raise proceeds of £600m (R14.1bn) and a loan facility to Al Noor of up to £400m (R9.4bn). The facility was jointly underwritten by Rand Merchant Bank and Morgan Stanley.
The acquisition of Al Noor will result in the creation of a leading international private healthcare group with deep operational expertise and a well-balanced geographic profile in Southern Africa, Switzerland and the UAE, as well as exposure to the UK market through a minority stake in Spire Healthcare. The combined business will, on a revenue basis, be the third largest private healthcare provider in South Africa, the largest in the UAE and the largest private medical network in Switzerland. Its pro-forma revenue amounts to US$4bn (R66bn) for the fiscal period 2014/15, comprising 46% from Switzerland, 31% from South Africa and 23% from the UAE. The group will operate 73 hospitals with approximately 10,200 beds and 37 clinics, and will have nearly 32,000 employees globally.
The Spire Healthcare and Al Noor transactions will give Mediclinic the ability to leverage the benefits of being an international group for its shareholders, doctors and patients. Transfer of best practices and cross-platform cooperation in developing new service lines (such as oncology, bariatric surgery and robotics) together with sharing and upgrading clinical skills will benefit patients across the group. The new geographies exhibit attractive healthcare market dynamics with high-growth earnings in hard currency. With its LSE listing Mediclinic International plc will provide greater access to global investors and increased liquidity of its stock. Due to the combined size of the group, it is expected to be eligible for inclusion in the FTSE 100 index and most likely realise a concomitant reduction in its cost of capital.
- Gareth Armstrong is a senior corporate finance executive and Jessica Spira a business development director at Rand Merchant Bank.