Primary Health Care’s play for the much larger Symbion Health is being seen by some analysts as a ploy to get taken out by its bigger rival.
Primary (PRY) now has a 6.7 per cent stake in Symbion worth $165 million, a cost too great for the smaller company to hang on to as an investment or to bide its time. It initially disclosed a 5.25 per cent stake on Monday and lifted it on Tuesday.
Primary says it has made a ‘confidential proposal’ to Symbion and brokers believe that this is for a merger: either PRY will do the merging or Symbion will see the logic and move. Either way the companies would have a combined value in excess of $4.6 billion.
Symbion shares jumped the day after the PRY approach was made public and hit $4.26 before easing to finish around $4.13 yesterday.
In contrast, PRY shares have gradually edged higher, rising from $13.20 to close yesterday at $13.89, a big vote of confidence from investors.
Symbion has rejected the approach saying the PRY approach was to ‘lowball’ but that’s not how investors and some analysts are seeing it.
Primary has been telling analysts and others that it sees significant synergies in merging with Symbion: upwards of $100 million has been mentioned in broking notes to clients.
This is a big selling point and Primary management claims that this equates to more than $1.50 a share in value but analysts have pointed out that Symbion management are committed to taking $40 million in costs out of their business over two years, cutting the amount of savings freely available to PRY.
The big savings however could be in the pathology businesses of both companies. Symbion has a very much under-used newish facility in Sydney that it wanted to boost by buying PRY’s pathology operations late last year. Primary rejected the advance and it’s from this approach that PRY started working on a possible deal with SYB.
But combining the two pathology businesses would create a company with clout in this area: an estimated 42 per cent national share, with Sonic the other major player. Primary currently has around 4 per cent of the national market, but 11 per cent in NSW. SYB has 38 per cent of the national market but is weak in NSW.
In Diagnostic imaging the two companies would be weaker: around 18 per cent to 20 per cent of the national market.
Primary’s health centre business would be a key part of any merged company and would drive much of the growth in diagnostics and in pathology.
SYB’s other major business is pharmaceuticals and drug distribution where it has a 29 per cent share with Sigma (SIP) and API the other major players. API is the weak one with its financial and stock control problems of last year still undermining its efforts to regain credibility in the market.
Selling the distribution business would be tough to either API (couldn’t afford it) or SIP (bad competition problems) but it would raise enough cash to cut the debt incurred in any merger by a significant margin, according to some analysts.
API shares traded around $2.11 yesterday and Sigma’s rose to $2.66.
Sonic, the diagnostic industry major, was easier after the Primary move on Symbion and its shares closed around $14.45 yesterday as investors felt it could lose out if Primary and Symbion combine.
Primary’s management has a health orientation and background while Symbion’s management team is more corporate and not so plugged into the medical side of the business.
This is one of the reasons why PRY’s sales have risen by more than 20 per cent a year over the past five years and SYB by around four per cent.
Symbion management might not want to merge at the current price but they will have to realise that the best value is to effect a merger somehow and allow PRY management to run the ship
Symbion showed no recognition of that point in its statement: “The proposal is incomplete, non-binding and has an indicative value which is at a significant discount to Symbion Health’s recent trading prices.
“The proposal has not progressed as it was not considered to be in the best interests of Symbion Health’s shareholders.”
Symbion said it remained committed to its current strategies.
“These strategies are progressing well, and the Symbion Health board is confident that these strategies will deliver significant value to Symbion Health shareholders,” Symbion said.
But what PRY has done is grab the first mover advantage: Symbion tried to get hold of the Primary Pathology business without success. That got PRY management thinking and they can see a way of growing the combined business in a way that SYB’s differently orientated management can’t.
At worst PRY has bought into any dealings that might happen around Symbion. It especially means that it has first dibs on the pathology and medical centres businesses of SYB. The Diagnostics business of PRY is small beer and would be better in SYB.
Sonic has more interest in the US and UK than in Australia so the market reaction to it is a bit misplaced.