Wrap Text
Netcare - Pro forma financial effects and withdrawal of cautionary
announcement
Network Healthcare Holdings Limited
Incorporated in the Republic of South Africa
Registration number 1996/008242/06
JSE Code: NTC & ISIN: ZAE000011953
("Netcare")
NETCARE"S ACQUISITION OF A CONTROLLING INTEREST IN GENERAL HEALTHCARE
GROUP LIMITED ("GHG") IN THE UNITED KINGDOM ("UK") - PRO FORMA FINANCIAL
EFFECTS AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Further to the announcements dated 25 April 2006 and 15 May 2006 regarding
the acquisition by Netcare of a controlling interest in the leading
private hospital operator in the UK, General Healthcare Group Limited
("GHG") from funds managed by BC Partners ("the GHG acquisition"), this
announcement serves to provide the financial effects arising on the
retrospective application of the GHG acquisition, as required in terms of
the Listings Requirements of the JSE Limited ("the Listings
Requirements").
GHG is the leading provider of private acute care in the UK, with a
national network of 49 hospitals comprising 2,476 beds operated
predominantly under the "BMI" brand. GHG"s facilities, employees and
relationships with doctors and consultants enable it to offer a
comprehensive range of medical and surgical services across the UK. For
the year-ended 31 December 2005, GHG reported gross revenue and EBITDA of
GBP612m (R7.1bn) and GBP164m (R1.9bn) respectively (before the IFRS
conversion and applying an average rate of exchange for the stated period
of R11.56:GBP1).
Overview of the * Netcare ** GHG Combined % change
combined group
Revenue - GBP GBP689m GBP612m GBP1,301m 88.8
Revenue *** - Rands R7.5bn R7.1bn R14.6bn
EBITDA - GBP GBP132m GBP157m GBP289m 118.9
EBITDA *** - Rands R1.4bn R1.8bn R3.2bn
Hospitals and 71 49 120 69.0
ambulatory day care
centres
Beds 9,285 2,476 11,761 26.7
Theatres 358 152 510 42.5
Pharmacies 82 37 119 45.1
Employees 16,574 8,300 24,874 50.1
* = Based on the 2005 published financial information. Includes
subsidiaries, associates, public private partnerships and Netcare UK
** = As at 31 December 2005. Based on 2005 financial
information converted in terms of IFRS
*** = Converted at R11.56:GBP1, being the average rate for the 12 month
period ended 31 December 2005
Netcare has undertaken the acquisition of GHG as part of a Consortium with
three leading UK-based financial and property investors - funds advised by
Apax Partners Worldwide LLP ("Apax Partners"), London and Regional
Properties LLP ("London & Regional") and funds advised by Brockton Capital
LLP ("Brockton") (together, "the Consortium Partners"). The purchase
consideration for GHG on an enterprise value basis is in the order of
GBP2.2bn (excluding transaction costs) with Netcare"s investment for its
controlling interest being by way of a cash investment of GBP219m and the
injection of its wholly-owned UK subsidiary Netcare Healthcare UK Limited
("Netcare UK"). The remaining purchase consideration has been provided by
the Consortium Partners, together with debt financing raised within GHG on
a non-recourse basis to Netcare.
The acquisition of a controlling interest in GHG transforms Netcare into
one of the world"s largest hospital groups with significant potential for
future growth and value creation for all stakeholders, both locally and
internationally over the medium to long term.
The acquisition of GHG brings Netcare a number of key benefits:
* Establishes Netcare as one of the world"s largest healthcare groups,
with 120 hospitals and ambulatory day care centres and over 11,500 beds
under management in an industry where scale is becoming increasingly
more important in improving efficiency, affordability and the quality of
clinical services;
* Provides Netcare with a clear leadership position in the UK, one of the
largest and most attractive healthcare markets globally;
* Enhances the growth prospects for Netcare as a result of the
opportunities within the UK healthcare market;
* The combination of GHG and Netcare UK allows Netcare to position itself
to best capitalise on the opportunities that both the privately and
publicly funded healthcare segments present;
* Enables Netcare to enhance GHG"s profitability by leveraging its
intellectual property through the introduction of certain operating
skills and practices, as well as ancillary healthcare businesses across
the GHG business;
* Provides investors with currency diversification as a significant
proportion of Netcare"s revenue and earnings will be earned offshore;
and
* Provides Netcare with an improved platform for future international
expansion in the longer term.
2. RATIONALE FOR THE GHG ACQUISITION
Having determined that the next stage of Netcare"s corporate development
would involve international growth, Netcare has over several years sought
opportunities for investment and expansion outside of South Africa. The
acquisition of GHG represents an important step for Netcare providing a
leadership position in an important overseas market. The acquisition
represents the spearhead for international expansion.
Since first establishing a presence in the UK in 2001, Netcare has
developed a notable position in the UK serving the government outsourcing
market. Netcare has successfully competed against domestic and
international groups to be awarded a number of contracts from the
Department of Health ("DoH"). Netcare has built a solid reputation
delivering well against the service and quality standards under the terms
of these contracts. Such a presence allowed Netcare to establish
relationships with the DoH, other funders and the medical practitioner
community. This provided Netcare with a strong understanding of market
dynamics and allowed Netcare to assess growth options.
Netcare had determined that entry into the private pay markets (funded by
private medical insurance ("PMI") and end-patients ("self pay")) required
an acquisition given the barriers to new entrants. Planning and a lack of
land availability make it difficult to develop new hospitals in
demographically attractive locations. In addition, a network of
established facilities provides a significant attraction for insurers and
medical practitioners alike.
Netcare has pursued the acquisition in a disciplined and cautious manner
building on the experience of operating in the UK as well as seeking third
party verification of key issues over an extended timeframe. Key steps
included:
* Key market assumptions were tested with third party consultants;
* The selection of Consortium members and the development of a Consortium
partnership agreement was pursued over an extended period of several
months thus ensuring alignment and appropriate negotiation;
* Undergoing an extensive internal business development plan process to
ensure the merits of the acquisition were weighed appropriately and also
to ensure that resources required to deliver against the plan would not
be unduly detrimental to the South African operations;
* Pursuing an extensive due diligence process in partnership with the
Consortium partners through both direct activity and external advisers
on legal, financial, commercial, environmental, taxation, property and
related business issues; and
* Utilising both Consortium partners and legal and financial advisers to
select and fully negotiate debt financing for the acquisition.
Through this acquisition Netcare has secured control of the largest UK
hospital provider serving the PMI and self pay segments. Netcare"s
evaluation suggests that GHG benefits from a number of key strengths:
* Strong national presence focused around attractive demographic locations
such as the South-East and suburban locations around London;
* Strong established relationships with PMI insurers. GHG"s position as a
significant customer of this important payer group provides an
attractive base upon which to build and further develop relationships;
* Well-invested facilities, largely purpose built which attract medical
practitioners and patients alike;
* Strong relationships with suppliers of medical consumables, drugs and
ancillary products; and
* A strong employee base and extensive relationships with more than 4,200
medical practitioners.
Each of these factors indicates that building a group of such a calibre
and market presence, whether by way of greenfield development or the
acquisition of single smaller hospital groups, would be a significant
challenge and would likely take considerable time.
Given the financial resources available to Netcare, management had
determined that an outright acquisition would have been difficult if not
impossible to finance and would have restricted Netcare"s ability to
pursue initiatives in South Africa. By working through the Consortium,
Netcare benefits from control of GHG, the largest player in the UK, while
limiting Netcare"s investment to GBP219m. In this way, the Consortium
approach represents a cautious route to international growth.
Netcare management believe GHG offers further opportunities for growth and
development both within the privately reimbursed PMI and self pay markets
and the state funded market. Within the traditionally privately reimbursed
market GHG as a network is geographically well positioned in areas of high
PMI penetration and membership. GHG ranks well in doctor surveys in issues
such as service delivery, equipment and overall offering. Netcare"s due
diligence indicated GHG offers several opportunities to substantially
differentiate and expand the service offering and consequently grow market
share.
In the state funded market, management believe the combination of Netcare
UK and GHG means the combined organisation will be well-positioned to
compete for contracts and also under the initiatives to give patients more
choice.
The Labour administration has been pursing a policy of contracting with
private providers for the provision of healthcare services including the
provision of surgical and diagnostic procedures. Netcare UK has achieved
significant success, winning contracts and delivering a high quality
service.
Current policy of the Labour administration to pursue the `Patient Choice
Initiative" under the terms of which publicly funded patients requiring
various medical procedures will be offered five potential venues including
one operated by a private provider, will also expand the publicly funded,
private sector provided segment. The current position of the Conservative
party is also to support increased participation of private providers. The
privately provided market is small compared to the publicly provided part.
Thus the impact of movements from the publicly provided segment to the
privately provided segment can make a significant impact on the size of
the privately provided market. Management believe that the combined
organisation is well-positioned under scenarios of either increased or
decreased state outsourcing of healthcare provision.
The combination of GHG and Netcare"s UK activities also means that Netcare
UK is considerably assisted in its participation in the current DoH
outsourcing programme by now benefiting from an asset base which could be
utilised for the execution of particular tenders. Without this,
substantial capital investment would have been required in terms of
facilities and hospitals.
Strategy
Following the GHG acquisition, the strategy for the enlarged group in the
UK will involve:
* The continued commitment by Netcare to being the National Health Service
("NHS") partner of choice, providing sustainable solutions for the
benefit of patients;
* The further development and growth of the private acute market, serving
both the insured and self pay segments;
* Delivering the highest possible standards of patient care across all
services;
* Employing the combined expertise and experience of the senior teams from
both businesses to drive innovation, excellence and growth;
* Being the private sector employer of choice, offering outstanding career
opportunities for high calibre individuals;
* Utilising cost savings opportunities afforded by the scale and presence
of the new combined group;
* Ensuring the sharing of best practices across the combined group to
increase both quality of care and efficiency.
Given that, Netcare intends, to the extent possible, to utilise UK based
employees to further develop the GHG business, Netcare does not envisage
denuding Netcare"s South African operations in any way. Indeed, the South
African operations should also derive considerable benefit from being part
of a larger organisation through various cross pollination initiatives.
3. PRO FORMA FINANCIAL EFFECTS
The table below sets out the pro forma financial effects of the GHG
acquisition on Netcare which have been reported on by Grant Thornton. Due
to the nature of these pro forma financial effects, they are presented for
illustrative purposes only and may not fairly present Netcare"s financial
position or the results of its operations after the GHG acquisition.
A simple consolidation of the historical financial information does not
appropriately reflect the future prospects of the combined businesses due
to, inter alia, the following factors which are not incorporated:
* any efficiencies in relation to the improved cost of finance upon
refinancing both the GHG and Netcare debt from the bridging facilities
raised in terms of the GHG acquisition;
* exchange rate variances;
* the benefits of the revenue optimisation and operational excellence
initiatives which form part of Netcare"s initial three year and ensuing
seven year business plan for GHG;
* NHS tenders being bid on by Netcare UK and Amicus (a division of GHG),
or for which they may be granted preferred bidder status;
* rationalisation benefits arising from cross pollination initiatives
between Netcare, GHG and Netcare UK;
* the full impact of existing Netcare UK contracts with the NHS; and
* The earnings accretive effects of the Netpartner unwind, as these
transactions would not have been implemented as at the date of this
circular.
Consequently historical performance is not an appropriate reflection of
future prospects.
The pro forma financial effects are the responsibility of the Netcare
directors and are based on Netcare"s financial results for the six months
ended 31 March 2006 and the pro rata results of GHG based on the 12 months
to 31 December 2005 (converted in terms of IFRS). As the business of the
GHG Group is not subject to material seasonal fluctuations, the results
have not been seasonally adjusted but rather pro rata results for 6 months
have been presented. It has been assumed for purposes of the pro forma
financial effects that the GHG acquisition was implemented on 1 October
2005 for income statement purposes and 31 March 2006 for balance sheet
purposes.
Pro forma financial (1) GHG (2) "After" Percentage
effects for the six "Before" Acquisition the GHG change
months ended and as the GHG acquisition
at 31 March 2006 acquisition
Earnings per share 25.4 72.7 98.1 286.2
("EPS") (cents) (5)
Diluted basic 24.8 71.1 95.9 286.7
earnings per share
(cents)
Earnings per 25.4 (6.6) 18.8 (26.0)
share-continuing
operations (cents)
Headline earnings per 25.6 (6.6) 19.0 (25.8)
share ("HEPS")
(cents) (5)
Diluted headline 25.0 (6.5) 18.5 (26.0)
earnings per share
(cents)
Given the necessity for the use of short term offshore bridging facilities
in an exacting auction process, these effects have not been adjusted to
reflect the earnings impact through the customary utilisation of more
efficient funding.
Presented in note 4 below are the effects as if more efficient funding was
utilised as referred to above. This presentation is likely to be more
representative once the customary funding structures have been
implemented.
Notably, it is expected that on a pro forma basis, the initial cash flow
effects of the GHG acquisition are not significant and in the initial
years are expected to be largely neutral for Netcare.
Capital distribution 12.0 - 12.0 -
per share (cents)
NAV per share (cents) 244.7 - 244.7 -
TNAV per share 213.1 (957.4) (744.3) N/A
(cents) (6)
Ordinary shares in 1,450.0 - 1,450.0 -
issue
Weighted average 1,448.3 - 1,448.3 -
number of shares
Diluted weighted 1,482.9 - 1,482.9 -
average number of
shares
1. The "Before" financial information has been extracted without
adjustment from Netcare"s published unaudited interim results for the six
months year ended 31 March 2006.
2. The reviewed "After" calculations are based on the following
assumptions:
- Land and Buildings within GHG were revalued to fair value;
- Deferred tax at a rate of 30% was raised on the revaluation
surplus;
- Existing debt within GHG at above market related rates was refinanced
by market related debt on acquisition. This had the effect of
reducing the finance charges for the period as a result of the lower
interest rates obtained;
- GHG income statement information for the pro rata six-month was
converted at R11.14:GBP1, being the average rate for that period,
whereas balance sheet information was converted at R10.88: GBP1,
being the closing rate as at 31 March 2006;
- Depreciation was increased commensurately as a result of the fair
value revaluation of land and buildings.
3. The pro forma financial effects have been prepared in terms of The
Guide on Pro Forma Financial Information issued by the South African
Institute of Chartered Accountants. In line with the Listings Requirements
of the JSE, Netcare formally adopted International Financial Reporting
Standards ("IFRS") with effect from 1 October 2005. GHG financial
information for the year ended 31 December 2005 has been restated in terms
of IFRS.
4. Presented below are the effects on EPS and HEPS as if more efficient
funding was utilised as referred to above.
(1) GHG (2) "After" Percentage
"Before" Acquisition the GHG change
the GHG acquisition
acquisition
Earnings per share 25.4 74.2 99.6 292.1
(cents)
Headline earnings per 25.6 (5.1) 20.5 (19.9)
share (cents)
5. Included in EPS for GHG are profits on the disposal of businesses,
which have been excluded from HEPS. The impact on Netcare EPS of the profit
on the disposal of Netcare UK has also been excluded from HEPS. EPS and
HEPS are reconciled as follows:
Headline earnings reconciliation - R million Number of Cents per
impact of GHG acquisition shares share
(million)
Basic Earnings 1,421.5 1,448.3 98.1
Disposal of businesses - GHG (1,043.3) 1,448.3 (72.0)
Netcare UK (105.6) 1,448.3 (7.3)
Netcare capital adjustments 2.4 1,448.3 0.2
Headline earnings 275.0 1,448.3 19.0
6. The negative TNAV arises largely as a result of goodwill arising from
the acquisition as well as goodwill within GHG. It is expected that the
goodwill acquired may reduce once the fair value of all assets acquired
(required in terms of IFRS 3) is determined.
4. TERMS AND ADDITIONAL FINANCIAL INFORMATION
The Consortium has acquired 100% of GHG for a total consideration of
GBP2.2bn (excluding transaction costs) on an enterprise value basis.
Netcare will own 52.6% of GHG in return for the investment of GBP219m
("Netcare"s investment") and the contribution of Netcare UK, with the
other Consortium partners having contributed GBP303m for their collective
47.4% interests. Notably, GHG management will be entitled to participate
in a performance based equity interest which may equate to approximately
4% of the equity over a period. Netcare will not dilute to less than 50.1%
as a result of this participation. Given the necessity for the use of
short-term offshore bridging facilities in an exacting auction process,
Netcare"s investment has initially been funded using bridging facilities
provided by Dresdner Bank AG (London Branch) that have been raised for the
purposes of this acquisition. The remaining funds were provided by the
Consortium Partners and debt financing provided by Barclays Capital and
Dresdner Bank AG raised within the GHG group on a non-recourse basis to
Netcare South Africa. Interim bridging finance is currently in place and
shall be replaced in due course by longer term funding arrangements which
are in the process of being finalised.
All of the conditions, including the settlement of the purchase
consideration utilising the various interim facilities and effective
transfer of ownership relating to the acquisition by Netcare and its
Consortium partners of GHG were completed on 12 May 2006.
Although formal approval from Netcare shareholders was not required in
terms of the Listing Requirements of the JSE, the JSE required that
Netcare obtain irrevocable support from large shareholders owning in
aggregate more than 50% of the votable shares of Netcare. Support was
obtained from 100% of all shareholders approached, representing more than
60% of the votable shares of Netcare.
5. DEBT STRUCTURING
GHG funding arrangements
All existing debt within the GHG Group has been repaid or restructured in
full on acquisition.
Currently, GHG"s debt finance is provided by way of short-term bridge
facilities that are secured against the assets of the GHG group. Plans to
restructure the GHG business into a group of operating companies (the
"Opco Group") and a group of property-owning companies (the "Propco
Group") are already at an advanced stage.
The major feature of the restructuring is the transfer of much of GHG"s
real estate into non-trading property-owning companies. These property-
owning companies will lease the real estate to members of the Opco Group.
This restructuring enables the Opco Group and the Propco Group to raise
long-term financing independently of one another. The long-term facilities
will be used to refinance the bridge facilities and will significantly
reduce the cost of finance to the GHG group as a whole.
In addition, significant potential exists to develop the earning potential
of existing properties and for cash generation through disposal of surplus
property. Both these opportunities will assist GHG and the Netcare Group
to further reduce debt in GHG and improve gearing ratios going forward.
The bridging facilities within GHG have been raised from Dresdner Bank AG
London Branch and Barclays Capital in two tranches as follows:
Short term bridge finance to be replaced by Opco GBP"m
Group and Propco Group debt
Bridge loan - Tranche A 1 165.0
Bridge loan - Tranche B 750.0
Total GHG debt 1 915.0
The Opco Group facilities will be secured against the assets and shares of
the Opco Group. The Propco Facilities will be secured by mortgages over
real estate and share security. Hedging against interest rate increases
has been secured for 25 years.
Importantly, the GHG debt has been ring fenced within the UK and does not
have any recourse to Netcare in South Africa.
Bridging facilities raised within Netcare for the purposes of the GHG
acquisition
The investment of GBP219m made by Netcare to acquire its 52.6% interest in
GHG has initially been financed by way of bridge financing which is normal
in leveraged buy outs and short term by nature. Various alternative
options are currently being considered which will be more permanent in
nature and likely to reduce financing costs in the future. Foreign
currency risk has been eliminated through forward cover swaps at an
effective rate of R12.17:GBP1.
The interest rate risk inherent in the offshore loan has been combined
into the integrated treasury management process within Netcare. In terms
of the current policy Netcare hedges up to 75% of all debt in relation to
interest rate risk. This allows sufficient flexibility for future
operating cash flows, corporate action and the short term issue of its
perpetual preference shares. As at 30 June the interest rate risk on
approximately 50% of Netcare debt had been hedged with it constantly being
reviewed.
6. DOCUMENTATION
A circular containing full details of the GHG acquisition will be posted
to shareholders in due course.
7. WITHDRAWAL OF CAUTIONARY
Shareholders of Netcare are no longer required to exercise caution in
their dealings in Netcare shares.
Johannesburg3 July 2006
Financial Adviser to Netcare Transactional Sponsor to Netcare
Dresdner Kleinwort KPMG Services (Proprietary) Limited
Provider of finance to Netcare Sponsor to Netcare
Dresdner Bank AG (London Branch) Merrill Lynch
Legal Advisers to Netcare Legal Adviser to the Consortium
HR Levin Attorneys Notaries and Ashursts
Conveyancers and Norton Rose
Adviser to Netcare Debt providers to the Consortium
Centric Capital Barclays Capital
Independent Reporting Accountants
and Auditors to Netcare
Grant Thornton
Date: 03/07/2006 02:04:34 PM Supplied by www.sharenet.co.za
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