Canadian investment firm Brookfield is a global financial giant with a trillion dollars under management, yet it could not save Healthscope and decided to walk away with a $2 billion loss.
The controversial Northern Beaches hospital in Sydney is among Healthscope’s assets.Credit: Renee Nowytarger
In simple terms, it paid too much using too much debt, and sold off the land for many of these hospitals to landlords under deals that allowed them to charge too much for rent.
As an interesting contrast, unlike Healthscope, Ramsay owns most of its hospitals and the land they sit on.
It means Healthscope lenders who are owed $1.6 billion, including Australia’s Big Four banks, will also wear massive losses once the proceeds of the sale are divvied up between them. The good news is that this will ensure the business is transferred with zero debt in any sale.
Landlords will also be wearing a lot of the pain to help many of these hospitals become financially viable for a new private owner. The alternative is closure if state governments don’t step into the breach.
Healthscope’s hospitals would be empty if doctors lost faith and moved their elective surgeries to private hospitals nearby.
This explains why Healthscope reached its own abyss well ahead of its rivals, and faces a much larger challenge just to get back to the abysmal state the sector as a whole faces.
Separate to this is the immediate challenge that La Spina faces in running the day-to-day operations at the hospitals, and it explains why his fireside chat came with so much heat: Healthscope desperately needs to keep faith with the many specialist doctors and surgeons who actually generate its revenue.
Around 70 per cent of elective surgeries in Australia take place in a private hospital.
La Spina knows that the last thing they want is Healthscope in the hands of a private health insurer, who could dictate how much a hip replacement should cost.
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Healthscope’s hospitals would be empty if these doctors lost faith and moved their elective surgeries to other private hospitals. If this business flows out the door, it doesn’t matter what happens to its rent bill and debt levels.
La Spina may not like it, but the truth is BUPA is almost certainly among the parties interested in buying either all of Healthscope’s operations or parts thereof, and there is nothing he can do about it.
His immediate priority is to keep the day-to-day business running while the lender-appointed receivers from McGrathNicol kick off the sales process next month, with as many as 30 parties interested in Healthscope as of this week.
The receivers have one job, maximise the sale price and return as much money as possible to the lenders.
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To this end, they are expected to focus on a single transaction involving all of Healthscope’s assets – if possible. The price will be determined by the receiver’s delicate dance with landlords over how much financial pain they are willing to endure to give potential suitors confidence they are buying a viable business.
If the rent concessions are too low, the hospitals won’t find a buyer and their staff could be out of a job.
The success of any sale is also heavily dependent on whether all potential white knights are allowed to come to Healthscope’s rescue.
The interested parties include private equity groups which the federal government has all but vowed to reject as potential owners.
While La Spina has put his cards on the table, let’s see what his attitude will be in September/October when the receivers are down to the best offers, and know whether all the hospitals can be saved.
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