When this column last tipped Spire Healthcare Group in June, part of the company’s appeal was that it was a potential takeover target for Mediclinic International, the biggest shareholder. That approach, long expected, duly emerged on Monday, when Spire said the board had rebuffed a 298.6p cash and share proposal.
Mediclinic has argued that the proposal is a 30 per cent premium to Spire’s closing price on Tuesday last week, the day before it privately made its approach. It is, however, a 6 per cent discount to Spire’s year-to-date average price of 319p.
Spire has urged its shareholders to sit tight, while Mediclinic, which has until November 20 to “put up or shut up”, is now considering its options.
Investors would be wise to follow the advice of Spire’s board because Mediclinic’s “preliminary and conditional proposal” seems highly opportunistic. Spire is nursing a fall in its share price — down by more than a third between a peak in mid July and the eve of Mediclinic’s approach — after suffering a 75 per cent fall in first half-profits last month, eroded by a £27.6 million compensation settlement related to a disgraced surgeon. Hopes that the business was stabilising after delays in the redevelopment of St Anthony’s hospital in Surrey, one of its newer sites, were also undermined by a slowdown in revenue since July because of a decline in referrals from the NHS.
Mediclinic’s approach has also come a week before Justin Ash, the former boss of Oasis Healthcare, is due to take up the chief executive role at Spire following months of interim reshuffling at the top. Spire’s response to Mediclinic is being led by Garry Watts, the non-executive chairman, who was forced to revert from an executive chairman role in June because he was undergoing treatment for an illness. He is not deemed independent by Spire’s board because of his previous executive roles at the company. It raises questions about how well equipped Mr Watts is to ensure investors get the best possible outcome from Mediclinic’s interest.
A follow-up proposal from Mediclinic is likely. The consensus in the City is that the proposal of 150p cash and 0.232 new Mediclinic shares per Spire share is a low-ball and there is scope for improved terms. One other significant investor in Spire, who asked not to be named, indicated this week that an offer north of 355p would be more acceptable. That is the top of the 315p to 355p range the shares have traded in for the last two years and compares with a float price of 210p in July 2014 and 360p when Mediclinic acquired its initial 29.9 per cent stake the following summer from Cinven, the private equity firm that had floated Spire.
Mediclinic’s approach also comes at a time of weakness for its own business, however. Since acquiring Al Noor Hospitals, the Abu Dhabi operator, in an attempt to further diversify its portfolio, which includes businesses in South Africa and Switzerland, Mediclinic has struggled to integrate Al Noor and has faced recruitment issues. Danie Meintjes, Mediclinic’s chief executive, is also on the way out and due to retire by the end of July next year. Its shares, buffeted by confusion over government insurance reforms in Abu Dhabi, are down by a third over the past year and its leverage is on course to end 2018 at 3.2 times.
There is uncertainty over how it plans to fund the cash element of the proposal and depending on the appetite to increase its debt an equity raise may be needed. With a near 30 per cent stake and a seat on the board Mediclinic stands to benefit from Spire’s growth, but the prize is greater control and access to the UK market, where there are unlikely to be anti-trust issues.
MY ADVICE Buy
WHY An improved offer from Mediclinic seems likely
St James’s Place
There is nothing really to dislike in the latest results from St James’s Place, the wealth manager. As with previous trading updates from the Cirencester-based company, assets under management have continued to increase as Britain’s affluent put their nest eggs under its watchful eye.
At the end of September total assets under management stood at a little over £85 billion, up about £10 billion since the start of the year, with all three of its operating divisions reporting positive flows for 2017, in particular its pension business, which contributed half of the asset uplift.
From the retail distribution review to pension freedom rules, regulation has been on St James’s side since the crisis and, as such, it has prospered. Asset markets have also been highly favourable.
As markets have hit record highs, so have St James’s shares, which are up 25 per cent for the past 12 months and more than 200 per cent over the past five years. At their current price the market is valuing the company on a price earnings multiple of upwards of about 50.
Despite this toppy valuation, the City appears to think the only way is up for the wealth manager and notes out yesterday from the likes of Bank of America Merrill Lynch and JP Morgan rate the shares a “buy” as they look forward to further growth.
Indeed, it is hard to doubt the bull case. Markets are showing no signs of slipping, regulation favours its business model and clients like the company’s service, despite grumbles over its fee levels.
Yet for all the reasons to be positive, there are also reasons to be cautious. At the current share price St James’s Place looks more than fairly valued and it is difficult to make an argument for why investors should push it up further. Forward looking forecasts for its valuation put it on a substantially lower multiple. Then there is the threat from competition.
As attention on fees becomes more acute, the rich revenue streams coursing through St James’s Place may become thinner. And markets, when they fall, have a tendency to take asset managers with them.
For now, this looks like one where investors may be better off sitting on the sidelines.
MY ADVICE Sell
WHY The shares are fully valued — a good time to take some money off the table
