from afr
Healius chair’s head on a stick shows investors out of patience
If Healius cannot pull up its socks in the medium term, expect investors to push the board to think about other ways to realise value.
Nov 27, 2023 – 5.51pm
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Healius chairwoman Jenny Macdonald spent the weekend mulling two options: take the fall for a corporate calamity, or stare down investors and be turfed out anyway.
Sensibly, she took the first option. She still has to open the healthcare group’s annual general meeting on Tuesday, but having jumped first she will not suffer the indignity of also being voted out.
Healius big shareholders’ No.1 ask of the new chair is to fix operating performance. David Rowe
Macdonald’s crime? Overseeing a company whose previous regime had wasted its $500 million war chest on buybacks and M&A.
As we explored last week, Healius somehow went from cashed-up COVID-19 winner to being at the mercy of its banks within 12 months. Healius’ board fixed the financial problem with an emergency equity raising, which only fired up already frustrated investors and put it in the bucket of “sin bin” stocks with the likes of Star Entertainment and Bank of Queensland.
Macdonald’s fate was decided in meetings with investors last week, when they made it clear they wanted a head on a stick and would oppose her re-election.
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As the proxy votes rolled in ahead of Tuesday’s AGM, and as proxy advisers re-thought their recommendations over the weekend, it was jump or be jumped. Macdonald was going to go one way or the other.
Was it all Macdonald’s fault? No. Does she deserve it? Maybe.
Healius chair Jenny Macdonald will step down at Tuesday’s AGM.
But this is 2023 behaviour, typical of a year when investors want to see heads on sticks. You can feel the frustration and pain in investors’ voices as they recount decisions made by a company like Healius, which is supposed to be defensive and bankable but turned into anything but.
This frustration is compounded by wider market conditions.
It is hard to make money in the post-COVID-19 era, and investors have no more time for excuses. It is either get it right or move on; they want to see personal responsibility accompany any apology for a corporate cock-up. Sometimes, making money isn’t even enough (just ask Richard Goyder).
It doesn’t always matter who takes the bullet, so long as there is one.
At Healius, it could only be Macdonald. Chief executive Maxine Jaquet has been in the seat for less than 12 months and was herself a beneficiary of an investor-led push. She’s not out of the firing line by any stretch, but is new enough to get a reprieve and has another 12 months to turn things around.
Kate McKenzie, a director with a few hot potatoes on her books, was parachuted into the chairwoman’s seat on an interim basis.
If whoever replaces Macdonald on a permanent basis is also good at reading the room, they will realise the situation is a bit of a hornet’s nest. They are likely to find an unhappy couple of major investors with average entry prices well above the current share price, and now a laser-like focus on value creation.
Those investors include tough-talking fund managers Perpetual and Tanarra Capital Partners. They are two very different shops, but united in their bid to turn around Healius. They both want a less bureaucratic and more efficient money-making machine, and not something that keeps them up at night.
The new chairman’s near-term plan should be simple: get the existing crop of assets performing better.
The No.1 priority needs to be Healius’ pathology business, which is a blockbuster asset in terms of market share and heavily supported by government revenue. It should be springboarding out of the pandemic, but instead is suffering from weak volumes through its testing network and pallid referrals from GPs.
The good news is that Medicare data suggests some small green shoots in terms of GP visits. Healius now needs to convert that into swabs and tests, to make the most of its big footprint, which has a heavy fixed cost base and high operating leverage. Should volumes increase quickly, Healius should be printing cash again.
The chairwoman’s medium-to-longer term plan will have to consider asset sales, given the share price performance. There are a couple of bitsy potential divestments (vet pathology and clinical trials unit Agilex, for example) that could streamline the business and get management more focused on the two core arms of pathology and diagnostic imaging.
On the other hand, one of those core arms, Lumus Imaging, is also a big potential divestment. No one wants to have to deal their way out of this situation, but if business performance does not improve then expect the calls to grow louder.
Lumus Imaging is Healius’ second-biggest business unit and reported $491.1 million gross revenue and $96.2 million EBITDA in the year to June 30. It is bouncing back after a tough couple of years (COVID-19, mismanagement), and investors reckon it should report double-digit earnings growth in FY24.
Lumus Imaging is a big business in a reasonably consolidated Australian radiology market. But does Healius really need to own it? No. Pathology is its main game.
So if Healius cannot pull up its socks in the medium term, expect investors to push the board to think about other ways to realise value. And by other ways, they will be talking about a potential $1 billion-plus Lumus Imaging sale.
Who would buy it? Private equity has been in and out of Australia’s radiology sector for years, at both big players (I-MED) and putting together smaller roll-ups. The core-plus infrastructure funds have threatened to get more involved, and perhaps Lumus Imaging would be their chance.
You also have to wonder whether these two big shareholders will change their tune on the proposed deal with Australian Clinical Labs, should it ever get past the competition regulator and turn into an offer that is capable of acceptance.
They were united in their calls for Healius to reject the bid (even going public with their intentions on the same day back in March), but have only grown more mad with Healius’ board, management team and operating performance since.
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