Reading between the lines

The Healthscope deal says a lot about the Australian private equity market, but does it point to an increase in focus from the global firms? Jenny Blinch explores.

The bidding war for Australian Securities Exchange-listed Healthscope ended Monday with The Carlyle Group and TPG beating out Kohlberg Kravis Roberts with an A$2.7 billion offer.

During a visit to Sydney last week, when the bidding was in its final throes, the deal was a hot topic with GPs, bankers and lawyers alike. As the largest buyout to be transacted on Australian soil in two years, it is being held up as emblematic on many fronts.

Firstly, it is of course a sign that bank appetite for lending to buyout transactions is strong, albeit on a selective basis. “Lots” of banks were looking at the deal was the comment of one banker, while many pointed out that a mere 18 months ago a deal of that size would have been unthinkable. The financing package is reportedly worth A$1.5 billion.

Jenny
Blinch

Others pointed to the Healthscope take-private as a sign that fears foreign private equity firms would avoid investment in Australia due to uncertainty around the tax treatment of offshore holding companies in deal structures were unfounded. That TPG itself – the firm whose exit from Myer Group in October last year prompted the Australian Taxation Office to revise its private equity policies – is back in the fray suggested, said one professional, that the firm was confident it had found a way to navigate the uncertainty.

Some GPs also reflected that in keeping with the downturn-induced return to the core tenets of private equity investing, Healthscope was an example of private equity firms returning to doing what private equity firms do best: “buying companies no one else wants”, as one GP put it. The company was perceived to be under-valued on the stock exchange, and though there was one strategic buyer – Tenet Healthcare – in the mix, the pricing battle primarily centered on the rivalry between the two competing PE consortia.

One thing that remains to be seen, however, is whether Healthscope represents a renewal of focus on Australian buyouts for the global private equity firms active in Asia. Though TPG, the Carlyle Group, KKR, The Blackstone Group, and CVC Asia Pacific were all at one time bidders on the deal in various syndicate arrangements, their presence in the country has in general yet to extend beyond a couple of investment professionals on the ground and – at most – a couple of deals under the belt. KKR and TPG, for example, have done two each, while Healthscope is Carlyle’s third, CVC has inked four and the Blackstone group has yet to transact.

There was a time, Australian private equity sources noted, when several of the global firms’ plans for Australia were on a much grander scale, with intentions to beef out investment teams and increase spend in the market. However, these plans were sidetracked by the economic downturn, and, presumably, an increase in focus on Asia’s more alluring markets like China and India.

However, tax issues aside, Australia remains an approachable and relatively easy market for the globals to work in – the easiest, in fact, in Asia. Nowhere else in the region could you hope to complete a buyout in under six months, said one advisor.

As one (local) GP observed of the global firms: “If you can put $300 million to $400 million, or 10 percent of your fund, to work in one transaction and use the same banking network as you use elsewhere, it’s a good use of your time.”

And with dry powder in Asia still at high levels, it could be we’ll see several more Healthscopes in the next year or two.