By Liam Walsh
Bain Capital has secured the tentative backing of Estia Health’s board after increasing its takeover offer for the aged care provider by 6 per cent, valuing the company around $826.8 million.
Estia’s largest shareholder, Wilson Asset Management, described the increase on a proposal – from $3 per share to $3.20 – made in March as a “positive outcome” for investors. Estia shares rose 35¢ to $2.90, up nearly 14 per cent, on Wednesday, indicating some scepticism the offer will succeed.
The increase was first flagged by The Australian Financial Review’s Street Talk column, which reported that negotiations over the price between Bain and the Estia board had continued overnight, early on Tuesday.
“Following careful consideration of the revised proposal the board of Estia has determined that it is in the interests of shareholders to progress the revised proposal and allow Bain Capital to undertake further due diligence to enable it to provide a binding proposal,” the company said in a statement.
The due diligence period stretches into next month. After the first 20 days, Estia’s board will no longer be restricted from dealing “with potentially superior proposals from competing acquirers”, the company said, although it cannot shop itself around either in that period.
Estia is one of Australia’s largest aged care operators, having more than 6500 places in more than 70 homes across the country.
The business posted a deeper statutory loss of $25.3 million for the six months to December last year. It argued that earnings before tax, interest, depreciation and amortisation was $40.7 million, excluding acquisition costs, had actually improved on the previous period’s $4.7 million result.
Bain had been given to non-public financial information after its initial approach in March, but the Estia board – led by veteran dealmaker Gary Weiss – described the $3 per share offer as not compelling “having regard to price and conditionality”.
‘Strong track record’
Bain’s $3.20 per share proposal prices the company 50 per cent higher than Estia’s closing price of $2.14 one day before the private equity firm’s initial approach. It is 59 per cent higher than the three-month price to that date.
If Bain provided a binding proposal consistent with the revised proposal, then Estia’s board said it “intends to unanimously recommend … shareholders vote in favour of the potential transaction”.
The takeover would be made via a scheme of arrangement. That requires 50 per cent of the number of shareholders voting in favour of the bid, and accounting for 75 per cent of the actual number of shares voted.
WAM’s lead portfolio manager, Oscar Oberg, described the new offer as a “positive outcome”, adding that Mr Weiss had a “strong track record of acting in the best interests of shareholders”.
Mr Oberg, whose fund holds a 9.6 per cent stake in Estia, said factors supporting the sector included a favourable regulatory environment and an industry consolidation opportunity as smaller providers struggle to cope with an increasing compliance burden following a royal commission.
Bain still has several hurdles to clear, including final approval from Boston-based Bain’s investment committee and regulator approvals, including from the Foreign Investment Review Board. The private equity firm’s other Australian investments include Virgin Australia and Retail Zoo.
In the United States, private equity takeovers of retirement facilities have proved controversial. One 2017 paper, published in The Journal of Health Care Organisation, Provision, and Financing, concluded that research on private equity ownership of aged care homes showed “mixed findings”.
Some research indicated better financial performance than other for-profit nursing homes, and while one paper found no change in quality, two others found “significantly higher levels of deficiencies after private equity purchases”, it said.
Researchers, in a long-term study of one chain, found it seemed becoming owned by private equity “did not improve quality” for residents, while the “company structurally outperformed its industry counterparts post-purchase, showing higher operating margins”.
An Estia spokeswoman said its residents’ wellbeing was its “absolute priority” and the sector was heavily regulated to ensure “high quality”.