Ramsay enters trading halt following FY22 profit and dividends slide: KKR withdraws $88/share takeover offer

While Ramsay Healthcare (ASX: RHC) recently described an alternative takeover structure proposed by would-be acquirer, private equity group Kohlberg Kravis Roberts (KKR) as ‘meaningfully inferior’, this may also aptly describe the private hospital operator’s full year FY22 result which was announced this morning.

The takeover target posted a full year FY22 -37.6% fall in net profit to $274m - a major miss against Bloomberg estimates of $325.8m – on revenue of $13.7bn which was up 4.6% in the year to 30 June.

Adding to shareholders disappointment this morning management declared a final dividend of 48.5 cents (payable 20 October), down -53% on the 103 cents paid the previous year.

Trading halt

While the share price was destined to open lower on the back of today’s disappointing result, management has entered a trading halt, after receiving an update from its suitor KKR on its $20bn-plus takeover, and is expected to resume trading on Tuesday 30 August.

Ramsay has not disclosed the substance of today’s letter from KKR in any detail.

However, it’s understood KKR has taken its $88 a share offer on a whole-of-company basis off the table, in favour an alternative proposal.

Spin out the French

One lingering thorn in KKRs takeover bid for Ramsay was the requirement to get access to due diligence on Ramsay’s 52.8%-owned French hospital business Ramsay Sante - the second largest private hospital operator in Europe.

With Ramsay Sante being a listed company, Ramsay was not in a position to directly grant due diligence.

Adding to potential regulatory hurdles is KKR’s ownership of Ramsay Sante competitor Elsan, which has clearly made Ramsay’s French arm reluctant to open its books to such a direct and large competitor.

As a result, KKR is now more interested in acquiring Ramsay’s Australian operations and spinning the French component back to Ramsay investors.

While Ramsay has told shareholders to take no action at this stage, the board wants KKR to either retain their all-cash offer or put an improved alternative proposal on the table.

Highlights within today’s result

Whether it was by intent or not, antics around the KKR takeover offer have clearly diverted the market’s attention from an uninspiring FY22 result.

Key takeaways today include:

• Revenue across Asia Pacific operations, including Australia, fell -1.8% to $5.33bn, while earnings (EBIT) fell -26.5% to $467.3m.

• UK division revenue virtually doubled to $1.2bn, with recently acquired Elysium contributing $284.3m, but overall the UK operation made a -$26.2m loss, a $128.2m turnaround on the previous year, and included Elysium transaction costs of $26.2m.

• European revenue, including Ramsay Sante, jumped 7% to $6.66bn, and earnings (EBIT) jumped 15.9% to $450.2m.

Underlying earnings growth

Management told investors that $264m had been wiped off its earnings in the year to June 30, due to pandemic-fuelled elective surgery restrictions, and related costs plus successive waves of covid prevalent in the community in all regions, especially in Australia.

“Impacts included restrictions on surgical activity and the flow on effects of isolation orders and movement restrictions on the availability of staff, clinicians and patients, significantly impacting activity levels and costs,” the company noted.

However, management tried to reassure investors today that underlying earnings growth in FY23 will benefit from additional capacity and recent European acquisitions.

Looking forward

Due to soaring pandemic-related costs Ramsay also advised investors of plans to seek “improved terms with payors” but doesn’t envisage earnings recovering until 2024.

While Ramsay reminded investors that the industry continues to be under pressure from a high level of covid cases in the community, management believes the outlook for the group remains strong.

“We expect a gradual recovery through FY23 and more normalised conditions from FY24 onwards.”

Ramsay Healthcare enter a trading halt this morning.