TRIS Rating Co., Ltd. has affirmed the company and issue ratings of Bangkok Dusit Medical Services PLC (BGH) at “A”. At the same time, TRIS Rating has changed the rating outlook of BGH to “positive” from “stable”. The rating actions follow BGH’s announcement on 14 December 2010 that it has agreed to acquire Health Network PLC (HNC), the major shareholder of the Phyathai Hospital Group and the Paolo Memorial Hospital Group. The acquisition will be completed through a share swap. The “positive” outlook for BGH reflects its improving operating performance and financial profile, increased diversification of its customer base, and the potential cost savings derived from the HNC transaction. Based on its past track record of successful acquisitions, TRIS Rating believes BGH will have a smooth transition, without incurring costs or capital expenditures higher than expected. BGH’s ratings could be upgraded if BGH can keep the operation of each hospital under control and successfully integrate the hospitals under the HNC Group’s umbrella. Alternatively, any deterioration in financial performance or a higher-than-expected rise in leverage would negatively impact its ratings or outlook.
TRIS Rating reported that the acquisition will be funded by using a combination of cash, newly issued shares, and the transfer of an obligation between HNC and its subsidiary to BGH. For the initial stage of the acquisition, BGH will purchase all of HNC’s assets by using Bt680 million in cash, plus new 230.87 million shares of BGH issued at a price of Bt 37.75 per share, as well as acceptance of HNC’s obligation to pay the principal and accrued interest totalling not more than Bt430 million under the terms of a loan agreement between HNC (as debtor) and Paolo Medic Co., Ltd. (as creditor).
The assets of HNC to be acquired include 49.17% of the shares of Prasit Pattana PLC (PPCL), a 100% shareholding stake in Paolo Paholyothin hospital, 88.73% of the shares of Paolo Samutprakarn hospital, an 80.72% stake in Paolo Chokchai 4 hospital, and a 99.76% stake in Paolo Nawamin hospital. The shares of BGH received by HNC will be allocated to HNC’s shareholders. In addition, BGH will issue new shares through a private placement of 4.127 million shares, valued at Bt156 million. The private placement will be made to HNC’s major shareholders. After the acquisition is completed, HNC’s current shareholders will own 15.9% of BGH.
TRIS Rating said, BGH currently holds 19.47% shares of PPCL. After acquiring HNC, BGH will own 68.64% of PPCL. BGH is thus legally obligated to make a tender offer for all of the remaining shares of PPCL. BGH will use either Bt2,726 million in cash or 72.198 million of newly issued shares to complete the tender offer. The transaction is expected to close in the first quarter of 2011.
After the acquisition, BGH’s business profile is expected to strengthen while the financial ratios for leverage and profitability may change slightly. BGH’s competitive position will be enhanced as its market share based on a number of registered beds will increase from 9.3% to 14.6%. In addition, its customer base will be enlarged to cover the mid- to high-end segments in various locations. The debt to capitalization ratio is expected to hold in an acceptable range of 38%-44%, a slight change from 43% at the end of September 2010. Operating income as a percentage of sales is expected to remain at around 22%-23%. The expected cost savings, coming as benefits from economies of scale or improved utilization of shared assets and services among hospitals in BGH Group, may take time to materialize. In addition, the company’s relatively large asset base will keep the pretax return on permanent capital lower than its peers. However, across all the hospitals in the BGH Group, earnings before taxes, depreciation, and amortization (EBITDA) is expected to increase by 40% from around Bt5,000 million in 2009.
BGH is the largest private hospital operator in Thailand established in 1969. The company has continuously expanded by organic growth and by acquisition. The HNC deal is expected to extend BGH’s customer base into the social security and civil servant segments. As of December 2010, BGH operated 19 hospitals with 2,992 registered beds through these hospital brands: Bangkok hospital, Samitivej hospital, BNH hospital, and international hospitals under the Royal International hospital brand. After acquisition, the company will have 27 hospitals with 4,639 registered beds. Two more brands, the Phyathai hospital and the Paolo hospital, will be added to BGH’s portfolio, said TRIS Rating. -- End
Company Rating: Affirmed at A Issue Ratings: BGH113A: Bt3,000 million senior debentures due 2011 Affirmed at A BGH133A: Bt2,000 million senior debentures due 2013 Affirmed at A A BGH146A: Bt2,000 million senior debentures due 2014 Affirmed at A A BGH166A: Bt1,000 million senior debentures due 2016 Affirmed at A Rating Outlook: Positive from Stable
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