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Remgro and Mediclinic agree on buyout terms

Wayne McCurrie of FNB Wealth and Investments doesn’t think there’s any intention to shake up Mediclinic, and is confident Remgro and MSC Shipping will take over the private hospital group.

FIFI PETERS: Question: What do an investment holding company and a global shipping company have in common? Answer: A common purpose, it would seem, to take over a private hospital group, Mediclinic, which has operations in quite a number of places – South Africa, the Middle East, as well as the UK, last I checked.

[The two] are looking to take Mediclinic to the next level, and they released a really detailed update and statement today about how they plan to do that. Remgro and MSC Shipping are among the guys who are included in the consortium looking to acquire Mediclinic.

We have Wayne McCurrie, senior portfolio manager at FNB Wealth and Investments, [here] for more on this deal. Wayne, what do you make of this tie-up? I’ll tell you why I asked. When I saw that a shipping company, a company that has expertise in shipping and logistics and all of that, [and] an investment holding company are looking to take out a hospital company I thought to myself, where are the synergies there?

WAYNE McCURRIE: Look, they’re just doing it as a pure investment. Rembrandt [Remgro’s predecessor], of course, has owned a significant proportion of Mediclinic for a very, very long time.

So it’s not new to [Remgro] and it’s an extremely good global business in the healthcare sector. As populations get older and older and governments unfortunately can’t continue to provide good service, private hospitals will do very, very well.

So they obviously want to take it private and enjoy all the benefits of ownership themselves. Of course, [Remgro] is listed in South Africa, so you can still participate indirectly. But that’s why they’re doing it. It’s a very good business, and essentially they want all of that profit and cash flow to go into themselves, and not for the company to be separately listed.

FIFI PETERS: But when this deal is done, if it gets done, if it gets the thumbs-up from everyone, it looks like MSC Shipping will be the biggest shareholder in this equation?

WAYNE McCURRIE: Yes, they will be, as far as I could make out as well. Of course [Remgro] owns 44% already. So I’m not a hundred percent sure whether MSC will in fact be the biggest shareholder in the company. They might be taking the majority of shares, of the new shares they’re going to acquire, but [Remgro] already owns a significant proportion.

But of course it’s a standalone business; you don’t buy a well-run, really profitable good business to interfere with it.

You just want to own the shares and have the benefit of being a shareholder. So I don’t think there’s any intention to shake up Mediclinic. There’s nothing to shake up. It’s actually doing very well.

FIFI PETERS: Does that imply that the current management team – everyone who’s running operations, all of that – stays the same? The only difference is that it’s run in the public rather than the private space.

WAYNE McCURRIE: Yes, very much so. You don’t want to interfere, I would think, with the good management team.

Look, they have their fair challenges. There are still challenges in the medical field, and that’s mainly government regulation to try and control the cost of providing healthcare. I certainly know Mediclinic and many other companies have come under severe pressure, both domestically and overseas, from regulators who try and control the cost of healthcare. But they know they’ve come through that and they’ve come through the pandemic.

Surprisingly enough, the pandemic initially wasn’t that good for them because no one went and did elective surgery. Now they’re all back at hospitals, turnover is back to pre-Covid levels, occupancies are back to pre-Covid levels. So the business, as I’ve said, is actually a very good business.

FIFI PETERS: And those who can afford it are going in for their tummy-tucks just following that lockdown weight gain that some of us experienced. That kind of makes sense then when you say that the acquirers will most likely leave things as they are, leave management to do their thing because, as an expert in logistics and shipping, one has to wonder what you’ll be bringing to the table of a healthcare provider – other than perhaps capital and global expertise, because that’s what MSC does. They are bringing in the ability to really run a global business successfully, which I thought was a bit of shade-throwing [on] Mediclinic, just given its difficulty in other global markets.

But nonetheless, the market’s reacting to the share price, finishing off the day’s highs, finishing higher on a day where the market didn’t really do that well. Does that indicate that you guys are happy with the price, the offer price?

WAYNE McCURRIE: Remember, this is the second [offer]. Mediclinic rejected the first offer … so everyone knew a second offer was coming and everyone knew that a deal would eventually be struck.

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But when you look at the Mediclinic share price, it has run very hard since this deal was announced.

It has actually been a very good performer.

So, by and large, the deal price is in the current price.

I think the deal price, if you convert from [British] pence with the discount and all this sort of stuff, works out maybe a rand or two higher than the current R100 for Mediclinic. So, by and large, the offer price is already in the share price.

FIFI PETERS: All right. And the market is saying it’s a good deal.

WAYNE McCURRIE: I think it will be accepted by the shareholders. The share has run hard and they’re paying a 50% premium on the six-month average price. But that’s maybe not necessarily the best way to look at it. They are paying more or less a 20% or 25% premium on the last traded price before this deal was announced. So it’s still a very good offer and it’s at a premium, and the share has taken that into account.

FIFI PETERS: I think it was okay. So what does that leave you with in terms of choice? If you are looking to invest in a pharmaceutical company on the JSE, a blue-chip company – I don’t know if we still consider Netcare a blue-chip company. I think they did quite a lot to turn themselves around, but you’ve got the likes of Netcare and Life Healthcare. Who will you be left with?

WAYNE McCURRIE: Well, obviously Mediclinic’s one of the big ones and they know how to look, but the other companies also have international interests.

Of course nowadays you can take money overseas and buy whatever you want to, a pharmaceutical company. You don’t have to leave your money in the JSE. You can take a very significant proportion of your money overseas now, and you can invest directly. You are no longer limited to the choices on the JSE.

As we become more of more of a global market – and that’s a continuing trend that’s been around probably effectively for South Africa since the start of the 1990s – unfortunately there’ll be fewer and fewer companies listed on our JSE.

The truly big international ones will either list overseas, as all of our mining companies have done, and quite a few of our industrial companies, or, if they’re successful, they would be taken out like what’s happening now.

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So the outlook for the number of companies and the size of the JSE is probably going to shrink over the next few years. Not great.

FIFI PETERS: So is it too late to buy the stock right now if you want to benefit from this deal?

WAYNE McCURRIE: More than likely. Look, you’d probably earn more than keeping your money in the bank.

You’d probably earn more than cash on the deal if you had to go buy the shares now, ignoring tax and all of that.

But it’s arbitrage. It’s not actually an investment decision.

You’re just trying to arbitrage the couple of rand difference between the actual offer price and what the current share price is. Maybe you are lucky, maybe the rand weakens because they are paying you. Even though you will be paid in rands as a South African shareholder, the price is still calculated in pence. So it’s all arbitrage. It’s not actually an investment decision.

FIFI PETERS: The deal’s not done yet, though. What are some of the hurdles that they still have to go though?

WAYNE McCURRIE: Well, they are the normal hurdles. There are all the regulatory authorities, the Reserve Bank, all the government departments that have got anything to do with health, and companies and tax, and Sars [South African Revenue Service] and the competition commissioner … and, and, and. So I don’t know how many of them there are.

FIFI PETERS: But nothing to worry about?

WAYNE McCURRIE: No, because I can promise you [Remgro] and Mediclinic have had an army of lawyers look at all of this deal and they must be fairly confident. They will meet all the requirements and the deal won’t actually fall [through]. So I’m convinced it’ll go through.

FIFI PETERS: Yes, fairly confident, and those lawyers probably fairly compensated. This is not a pocket-change deal. But Wayne, we’ll leave it there for now, sir. Thanks so much for your time. Wayne McCurrie is senior portfolio manager at FNB Wealth and Investments.

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