Description

This is a bet (30% to 60% upside) on a corporate event which I expect could be announced on Thursday (May 25, 2023). I have used Google Bard to help me game the event. The predictions made by Bard have turned gears in my head as I think about the impact it could have on how I play this game in the future. 

Because the event is imminent, I will make this write-up very brief. I will provide more detail if requested.

Life Healthcare (LHC.JSE) has three assets

1. The South African hospital operation consisting of 49 hospitals housing 9 203 beds.
2. Alliance Medical Group (AMG), one of the largest imaging (Xray) providers in UK+Europe operating 264 MRI/CT/Pet-CT scanners. LHC has received unsolicited bids for this asset which is the main driver of this presentation.
3. LMI, a R&D operation developing molecular imaging agents. While I will ignore this in the write-up it is noteworthy that one of its products, Neuraceq, helps PET scanners identify the presence of amyloid plaques which may be an indicator of Alzheimer’s. The share price of LHC responded positively to the approval of Aducanumab (Biogen’s treatment for Alzheimer’s). Eli Lilly’s recently approved drug (Donanemab) also targets amyloid plaques which is positive for Neuraseq.

Enterprise Value

Sum-of-the-Parts Valuation

I want to make this very simple.

                AMG

AMG equity is worth between GBP684mil (ZAR 16 416mil) and GBP900mil (ZAR 21 600mil). The GBP684mil is derived using an EV/EBITDA of 12. This calculation is shown below. The GBP900mil is the “rumoured” amount in the market. It is also a valuation supported by BARD.

South African Hospitals

The general consensus is that hospitals are valued at a 7 to 8 times EBITDA. I will use 7 times. LHC report their 6month result in 4 days’ time. My estimate is they earn R1 750mil EBITDA which annualises to R3.5bil. In my opinion this is conservative given pre-covid EBITDA levels (Sept2019 = R3 933mil, Sept2018 = R3 703mil, Sept2017 = R3 420mil)

A quick reasonableness test. New hospital beds can cost up to R6mil to build which implies that the LHC is trading at 44% of its replacement cost.

SOTP Valuation

Bear case implies a 31% upside, Bull 61% upside.

Unsolicited Bids (Building the Mosaic)

1. LHC issued a cautionary on the 15 Feb 2023. Key extracts from the cautionary include

The Company wishes to advise shareholders that it has received several unsolicited proposals from third parties to acquire AMG. The unsolicited proposals received are non-binding, conditional and have been based on public information. AMG is one of Western Europe’s leading providers of complex molecular and diagnostic imaging services and a strategically important business within the Group.

Notwithstanding that AMG remains core to the Group, the Board is of the view that it has an obligation to evaluate the proposals received and assess the implications thereof in the context of the Group’s strategy. To this end, the Board has appointed Barclays and Goldman Sachs as advisors to assist in evaluating the proposals. Shareholders are advised that the Board’s consideration of the proposals is at an early stage and that no decisions have been taken, other than to undertake this initial assessment. In the interim, the AMG management team will remain focused on executing its strategy.

(https://df.marketdata.feeds.iress.com/feed/1377?token=eyJhbGciOiJIUzUxMiIsInR5cCI6IkpXVCJ9.eyJzZWNJRCI6Mzg0LCJpYXQiOjE2NDMzNjI5NTIsImF1ZCI6ImlyZXNzLmNvLnphIiwiaXNzIjoiYWNjb3VudHMuaXJlc3MuY28uemEifQ.1zb8jTm5tK8pXnZq9QLvwtxFWKZ1cyB9v8y4FsANYaolReVhp0nekg_X6T4wYU0_w8XZxei5KhbmYsXlwXG4RQ&headlineid=1063001748248986896)

2. Affidea, the Landmark comparative deal. Affidea was bought by Groupe Bruxelles Lambert (GBLB.BR) for EUR1 bil in July 2022.

GBLB provide detailed disclosure of their investment in Affidea and I have been able to estimate a deal multiple of 12 times EBITDA. (EBITDA = EUR125mil EV = Mcap+Debt = 1000 + 500 = EUR1 500)

I estimate an EBITDA of GBP82mil for AMG which implies an EV of GBP984mil and an equity value of GBP684mil (ZAR16 416mil) after deducting GBP300mil in debt.

My gut tells me this value is too low for the following reasons

- AMG is vertically integrated making its own isotopes.

- It’s below the book value of GBP900mil which would have made it difficult for management to entertain the bids.

- There were rumours that GBL was not the highest bidder for Affidea possibly justifying a higher multiple. (Speculation that the other bidders included Intermediate Capital Group (PE), Ares (PE), Unilabs, Biogroup, Synlab.)

- The valuation ignores the potential of Neuraceq. 

(Affidea operates 318 facilities across Europe generating EUR745mil in Revenue. AMG generated revenue of GBP379mil (EUR435mil))

3. Bard. This is where this write-up makes a left turn. I asked Google Bard to speculate on the deal. It’s guesses were spot on! Unilabs for GBP1 200mil and Radiological Partners for GBP1 400mil. I was just doing this for fun and because information/rumours on the deal was scarce. I was struck by the accuracy of the amounts predicted and also the ability of Bard to make credible predictions wrt the potential buyers. (Rumours are that it is an industry buyer, not PE and Bard seemed to know this.)

Before I get shot down, I am just as sceptical.  I have a big bet that the deal unlocks value (using call options vol =30%) and I am sitting on the edge of my seat hoping to make some money. I am also damn curious to see if the Bard predictions are accurate. If they are then this changes the way I need to play this game and we are only on Bard version 1.

Catalyst

On Thursday (May, 25) LHC report their results. I think there is a good chance that they may also give more information on the unsolicited bids.

Conclusion

Thursday is a big day. Let’s hold thumbs.

Catalyst

On Thursday (May, 25) LHC report their results. I think there is a good chance that they may also give more information on the unsolicited bids.