Last week’s remarkable “takeover” action in artificial intelligence specialist Appen (APX) is a reminder about the fickleness and unreliability of unsolicited ‘indicative, conditional’ offers. They are not takeover offers, but rather highly conditional “expressions of interest”.
In the space of nine hours, Appen confirmed that it had received an “unsolicited, conditional and non-binding indicative proposal” from Canadian IT firm TELUS International to acquire by way of a scheme of arrangement 100% of its shares at $9.50 per share and it was engaging with the bidder, before subsequently announcing that the bidder had dropped out and revoked the offer. No explanation was provided. Appen’s shares soared from the $6.40 they closed on Wednesday to trade as high as $8.64 on Thursday, before plummeting 21% on Friday to close back at $6.54.
This is not the first ‘indicative offer’ to die before it was born – Brambles suffered a similar fate a few weeks back. In fact, many ‘indicative offers’ lead to no firm takeover offer – the success rate in the Australian market is currently running at less than 50%.
So how should you react to an ‘indicative offer’, particularly if it relates to a ‘blue-chip’ company that hasn’t had its share price trounced? Let’s look at the current offer for Ramsay Health Care (RHC).
Over the years, I have been a huge fan of Ramsay Health Care. More recently, I have been a touch concerned about its expansion into European markets (the powerhouse is its Australian private hospital business) but put a “buy” on the stock in late February. In my Switzer Report article ‘Ramsay – a “blue chip” recovery stock’, [1] I wrote: “While there is ongoing political risk in regard to government intervention in the form of surgery restrictions or funding challenges … I am inclined to follow the lead of the institutional investors. About $65, Ramsay is a long term buy”.
Unbeknown to me, six weeks later, a consortium of financial investors led by KKR lodged a ‘conditional, non-binding, indicative proposal’ to acquire 100% of Ramsay by way of a scheme of arrangement at $88.00 per share. This values Ramsay at $20.1bn.
In addition, Ramsay would be able to distribute by way of a special dividend $823 million of surplus franking credits, which effectively adds $3.60 per share of value to the bid and takes the total price to $91.60.
Ramsay has been talking to the KKR consortium for some time and has granted them access to conduct ‘due-diligence’ on a non-exclusive basis so that they can explore whether they can “put forward a binding proposal that is in the best interests of Ramsay’s shareholders”.
The KKR consortium allegedly includes healthcare worker superannuation fund HESTA, and in addition to conducting due diligence, has been in discussion with lenders about financing such a large transaction. One area that has been explored in the media is that KKR may look to sell Ramsay’s property assets (chiefly hospitals) and then lease them back.
The deal will need regulatory approval, which will involve the Foreign Investment Review Board in Australia and numerous regulators in the UK, France and other European countries where Ramsay operates. Shareholder approval is also required, and in relation to that, the position of The Paul Ramsay Foundation, which owns approximately 19% of Ramsay Health Care, will be critical.
On the news of the bid leaking, the market soared from $64.39 to over $80.00, touching $84.58 on April 26. It has since fallen back, trading in a range between $77.00 and $79.00. On Friday, Ramsay closed at $78.41.
Ramsay Health Care (RHC) – May 21 to May 22
What do the brokers say?
Prior to the indicative offer, the major brokers’ consensus target price for Ramsay was $69.68. In response to the offer, most but not all raised their target price, and the current consensus (according to FNArena) is $78.60 (still below the offer price). The range is a low of $62.00 from Morgan Stanley to a high of $88.00 from Macquarie. The following table shows the major broker ratings:
On a multiple (PE) basis, they have Ramsay trading on high numbers – 62.5x forecast FY22 earnings and 38.7x forecast FY23 earnings. Together with the target prices, it is fair to say that the brokers believe that $88 represents a full price.
How to play
At $78.41 (Friday’s closing price), Ramsay is less than halfway between the bid price (effectively $91.60) and the price it is likely to return to if the indicative bid is withdrawn and no other suitors step forward. I guess this to be in the high 60’s, somewhere close to the pre-bid valuation of $69.68. On that basis, the market is saying that the bid is at best a 50/50 proposition of succeeding.
However, unless you are an insider with the bidder or at Ramsay, no one really knows. Certainly, there has been quite a deal of press speculation around how the bid may be funded, but it has been remarkably quiet in terms of what the due diligence has revealed or the bidder’s plan for the business – how KKR and its partners would drive value to substantiate the premium it is offering.
KKR’s bid has also not flushed out any other suitors – suggesting that the bid price is fairly full.
So how to play if you are a Ramsay shareholder?. I guess there are essentially three choices: do nothing now with your shares and wait; take the “profit” on offer now and sell your shares on the ASX, or a hybrid – maybe sell some shares on market now and keep the remainder to see what happens.
My inclination is to do the hybrid for a couple of reasons. Firstly, because I (like many other shareholders) have substantial capital gains and would like to take some of the profit this financial year. Secondly, I think the offer price is full given the implied multiple of FY23 earnings; and finally, I can’t readily see what KKR brings to the table that Ramsay management doesn’t have access to – so the odds of success favour the adoption of a more cautious position.
The operative word is “inclination” because I have no knowledge or insights that the market doesn’t have.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.