It’s back to the future for Ramsay Health Care.New Ramsay...

It’s back to the future for Ramsay Health Care.

New Ramsay chairman David Thodey is considering winding back the clock by exiting its biggest offshore investment and repatriating that capital back to Australia.

If Thodey does it, it would be a significant strategic shift. It would end a 15-year global push that started under late founder Paul Ramsay and, after all its purchases in Europe, Asia and the UK, refocus Ramsay on its core Australian hospitals, which are still its best business.

Former Telstra CEO David Thodey read the room when he took over as Ramsay Health Care’s chairman. David Rowe

There is even hope it could extract some of that capital locked up offshore to make its Australian business bigger, expanding while smaller and poorly capitalised hospital groups are struggling. Investment banks are on the scene.

To get there, Thodey’s board would have to make some hard decisions: the sorts of decisions that were impossible under the old guard. A bunch of institutional shareholders – Australia’s Perpetual and Ethical Partners, for example, and Hong Kong’s Maso Capital – are keen to see it happen, frustrated by years of underperformance and demanding change.

There are signs the board is listening. Ramsay sold its 50/50 Asia joint venture in late December, and now it is reviewing its biggest offshore investment and chief laggard, French hospitals group Ramsay Sante.

Ramsay owns nearly 53 per cent of the Euronext Paris-listed Sante. Analysts say that stake is worth more than $2 billion.

Selling it or spinning the stake off to shareholders would be a huge call by a new chairman only five months into the top job. It would require some very clear-headed and unemotional thinking; exiting France would be concrete proof of Ramsay’s shrinking global ambitions.

Ramsay’s board has four options for Sante: sell its stake in full, partially sell it (an each-way bet), distribute its Sante shares to Ramsay shareholders via an in specie distribution, or do nothing. The deliberations are live.

You will not hear the board talk openly about any of them; it cannot and does not want to provide running commentary. None of the options are straightforward and no single decision will appease everyone.

Ramsay’s decision to expand into France is a story from another era – when Australia’s domestic champions set their sights globally. It is a story of trying to capitalise on “the Ramsay Way”, a successful formula that built Australia’s No.1 private hospitals business and made investors, including its eponymous founder, rich along the way.

Ramsay bought into Sante nearly 15 years ago. Back then, CEO Chris Rex would entertain decent crowds at investor conferences in London with stories of market-leading shareholder returns and a “broader strategy of becoming a major global hospital operator”. The world was watching Australia’s Ramsay.

Hard yards

The investment was dubbed a “very attractive” entry into French hospitals and would be fed by the country’s ageing population. Ramsay said there was also a lot to like about France’s health system and hospitals market structure, it was investing alongside a good partner (Credit Agricole’s Predica) and thought it could roll up the private hospitals sector just like it had done back home.

What investors got was a business that was just nowhere near as good as Ramsay’s hospitals back in Australia.

For every dollar invested in France, Ramsay has only ever made one-third to one-half of what it could make at its 72 facilities back in Australia. That return on invested capital imbalance has never shifted.

Part of the problem is the regulatory regime. The tariff, the amount private hospitals can charge as set by the government, has not kept pace with cost inflation, while private hospitals also have to compete directly with public hospitals.

Another is the structure. Ramsay owns a controlling Sante stake and has the chairman’s seat, but there is a big partner in Predica and other minority shareholders. So while the stake is big enough to be consolidated into Ramsay’s financial statements – which gives it full ownership of Sante’s problems – it cannot get the wins it needs.

So after nearly 15 years of trying, why be in France at all?

Are the scale benefits of controlling Sante and being global (procurement, for example) real? If so, what are they worth?

Back home, investors are out of patience. This Sante position is big –Barrenjoey analysts say it will account for half of Ramsay’s revenue and 29 per cent of group earnings this financial year – and nearly 15 years is a long enough time to have made it work.

Like we said, the board has four options: sell its Sante stake in full (or find a buyer for the whole company), sell part of it (an each-way bet), distribute its Sante shares to Ramsay shareholders, or no change in strategy.

Investment banks UBS and Goldman Sachs are retained to help with the deliberations.

The review is complicated by the market backdrop in France. The latest private hospital tariff increase was a meagre 0.3 per cent – well below the 4.3 per cent for the public and not-for-profit hospital sector – and significantly less than cost inflation.

That makes it harder for Sante to make money. Jarden analyst Steve Wheen, arguably the best in the sector, said: “while Ramsay had expectations that it would be less [than last year’s 5.4 per cent increase], we do not think management would have been expecting 0.3 per cent”.

Months to decide

While Ramsay will not talk about it publicly and there is no formal end date to the review, the reality is that Ramsay’s board has until August to decide which way to go. If it hasn’t chosen by then, expect some of those shareholder frustrations to boil over. They want to see Ramsay out of France and see no reason why it cannot and should not be done.

You can tell there are plenty of discussions happening behind closed doors. A bunch of sell-side analysts have published Ramsay sum-of-the-parts valuations in the past few weeks and considered what Sante’s sale could do for Ramsay’s balance sheet.

Macquarie reckons Ramsay’s 52.1 per cent stake could be worth $2.1 billion, while Barrenjoey thinks it is more like $780 million to $2.08 billion. Ramsay, which knows the business better than anyone, is likely to think it is worth materially more.

Those closed-doors discussions have evolved significantly in the past 12 months. This time last year, a bunch of these shareholders were peppering directors and management with letters, calling for a strategic rethink and portfolio review.

It was significant that Thodey was announced as chairman in June, and took over from Ramsay lifer Michael Siddle in late November.

Following its acquisition of French operator Generale de Sante, Ramsay Health puts high hopes in its business in Europe. Bloomberg

At Ramsay’s result in February, the tone had changed. Ramsay CEO Craig McNally was calm and even philosophical, as were his shareholders, who liked McNally’s tightened capital management framework and more disciplined capital expenditure.

Fund managers also think recently appointed director Helen Kurincic has done a terrific job elsewhere.

Both of those are part of the Thodey effect – it did not take the former Telstra CEO long to read the room. But that doesn’t mean he will also just push through their thoughts on exiting France. Ramsay has spent 15 years going firmly down the global path; and while shareholders come and go, this important company has been around since the 1960s.

The other thing that has changed recently is investors’ respect for Ramsay’s powerhouse Australian private hospitals business – built up over decades, property-rich, with quality management, staff and relationships with government.

It’s tough in Australia’s private hospitals sector – as McNally warned in February, with cost rises easily outpacing reimbursements, including from health insurers.

But if you think it is tough for Ramsay, spare a thought for its highly leveraged arch-rival Healthscope (the No.2 player), now in restructuring talks with lenders, and not-for-profits in the sector (for example, Mater Health and St Vincent’s). Other players do not have the same access to capital or scale, and may not make it through the industry’s tough times.

Sometimes it takes a downturn for investors to appreciate which players really are rock solid.

While Ramsay will not be crowing about it, this pain in the sector could be win-win.

If Healthscope and the like’s calls for a bit of help for private hospital owners – either from the government or private health insurers – works, Ramsay will benefit. If they don’t, smaller players will come under further stress and bigwig Ramsay could step up and buy more hospitals or sign more management agreements – also a win.

That’s all well and good – but if Ramsay wants to get growth, even in its core Australian market, it needs to give those disappointed shareholders something. And that something increasingly looks like a Sante solution.