Healthscope Ltd (ASX: HSO) has given two market updates today, one about the takeover offer and a trading update.
Takeover offer
The private hospital operator announced that it has decided not to provide due diligence access to either the BGH – AustralianSuper Consortium or Brookfield. Healthscope also announced that it will undertake a review of its hospital property portfolio.
The Healthscope Board believes that the proposals undervalue Healthscope regarding various matters such as the improvement in operating performance from FY19 and beyond, returns from Healthscope's brownfield capital investment program, contribution from Healthscope's investment in the Northern Beaches Hospital and the value of Healthscope's underlying property portfolio.
The Board believes it is not in the best interest of Healthscope shareholders to provide due diligence access to either party.
Instead, the company will look at the merits of a sale and leaseback transaction with a view to unlocking value for Healthscope shareholders in the near future.
Healthscope Chairman Paula Dwyer said "Healthscope has an attractive and unique portfolio of property assets. A sale and leaseback transaction has the potential to reduce the quantum of property held on Healthscope's balance sheet, free up capital and release significant value to shareholders."
It seems that no takeover deal will occur, but Healthscope may sell its properties for more than the book value of $1.3 billion.
Trading update
Firstly, the company has completed a review of its hospitals and said its Victorian hospitals were underperforming, so it's closing Geelong and Cotham whilst recording an impairment on the Frankston Private Hospital.
According to Healthscope, the three above hospitals will incur an operating earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $8 million in FY18, which won't repeat in FY19. The closures will result in a non-operating charge of around $17 million which includes asset write-downs, redundancies and other costs.
Healthscope will also take a non-operating impairment charge of approximately $68 million relating to Frankston Private Hospital relating to asset write-downs and an onerous lease provision.
Consequently, Hospital Operating EBITDA is now expected to be between $340 million to $345 million compared to $359.4 million in FY17. Healthscope said its initiatives to right the hospital performance are starting to take effect.
Northern Beaches Hospital is on track to be open for operations in October 2018, Healthscope expects when it is fully functioning after a few years it will deliver revenue of $300 million and EBITDA of 15% on invested capital.
Healthscope has a received a few offers for its Asian pathology business and it is assessing these.
The company is targeting FY19 Hospital operating EBITDA growth of at least 10% compared with FY18.
Foolish takeaway
There was a lot to take in with these two updates. The sale and leaseback of its buildings seems like a clever move to unlock value. However, the trading update is disappointing. The ageing demographics of Australia should be improving the utilisation of hospitals, so it's surprising that it had to take the big step of closing them.
The share price will probably be volatile today. I sold my Healthscope shares, but if the share price were to drop far enough I may be interested in re-entering at the right price over the next few months.
