The completed $4.4 billion sale of Healthscope Ltd (ASX: HSO) to Brookfield Asset Management marks one of the largest ASX deals involving a private equity buyer and it has two implications for ASX investors that extend beyond the transaction itself.
Shareholders of Healthscope had overwhelmingly voted in favour of selling Healthscope to Brookfield yesterday after a 13-month courtship that had enough twists and turns to rival a TV soapie.
But the drama in the sector may not be over as attention focuses back on fellow medical facilities operator Healius Ltd (ASX: HLS), which if fighting off a takeover offer of its own.
Defensive stocks in favour
Before you get too excited, I don't think mergers and acquisitions (M&As) alone would make much difference to returns in the sector. A more powerful driver is risk appetite – or the lack of.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fell 0.2% at the open as trade war worries continue to pour cold water on global equity markets. Such nervous and uncertain times are arguably a better driver for shareholder value as investors will be forced to seek shelter in defensive sectors with dependable earnings.
This probably explains at least in part why defensive sectors are outperforming with the Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price and Cochlear Limited (ASX: COH) share price leading the healthcare sector higher.
The next takeover target
Healius's largest shareholder China's Jangho Group lobbed a $2 billion bid for the group and private equity groups are said to be circling the stock, which has shed close to 15% of its value over the past year when the market is up by around 8%.
The longer term thematic for stocks like Healius is good with the aging population but the group has a patchy track record when it comes to execution.
Fortunately (or otherwise depending on who you ask), other ASX medical facilities operators seem better run and that will limit M&A activity in this sector. In that respect, don't count on takeovers to boost the fortunes of shareholders in this space as we are more likely to see acquisitions in other sectors.
Industry super funds vs. mum and dad investors
The other takeaway from the Healthscope transaction is the role of industry superannuation funds. Healthscope received a competing bid from BGH Group, which had teamed up with Healthscope shareholder AustralianSuper. This rival bid was below the offer by Brookfield but AustralianSuper held a blocking 14% stake in the hospital operator.
Our largest industry super fund wanted to take part of Healthscope's assets and this creates a real conflict of interest for retail shareholders.
While the Healthscope worked out in the end for smaller investors, I suspect we will see more activism from industry funds, which could prove to be a double-edged sword if competing agendas are not properly managed.
Healthscope may have ended up in private equity hands (for the second time) but the impact of the transaction could stay with us for a while yet.
