Healthcare facilities investor Primary Health Properties (PHP) has announced a recommended all-share merger with healthcare property peer MedicX (MXF), a takeover representing a 14.3% premium to the target’s undisturbed share price.

By combining these two funds, which own and rent community healthcare facilities (particularly GP surgeries) in the UK and Ireland, the enlarged business should reap the benefits of scale. Crucially, shareholders should see a ‘material uplift’ in dividends, supported by the strong and highly predictable cash flows these two real estate investment trusts (REITs) enjoy.

THE BACKGROUND TO THIS MERGER

With an ageing (and growing) population, healthcare provision has become more vital than ever, particularly as the NHS is under pressure. A potential solution is to encourage more people to visit local GPs for non-urgent medical concerns. This is where the likes of Primary Health Properties (PHP) and MedicX come into play, by investing in modern primary care centres.

The merger will be implemented by way of a scheme of arrangement of MedicX, under which PHP will acquire all of the share capital in its smaller rival (in terms of total assets managed), which the transaction values at 88.7p per share or £392.9m.

Following the merger, expected to complete in March, PHP shareholders will hold 69.4% and MedicX shareholders 30.6% of the enlarged company respectively. MedicX shares are marked up 10.8% to 86p on the news, while shares in PHP are off 2.95% at 111.8p.

COMPELLING RATIONALE

The boards of both businesses point out their portfolios are highly complementary and the combined entity will ‘represent a stronger platform with increased scale and financial resources for further investment into its NHS-supporting estate’.

Furthermore, the enlarged company ‘will be more able to meet the increasing demand for high quality primary healthcare facilities across the UK and the Republic of Ireland thereby supporting doctors, alleviating pressure on hospital departments and ultimately aiding the welfare of patients.'

More specifically, the combined group will boast a portfolio of 479 properties in the UK and Republic of Ireland with a combined value of £2.3bn. It will be better placed ‘to meet the increasing needs of the primary healthcare sector in the UK and the Republic of Ireland, for the provision of a range of modern, purpose-built and integrated primary healthcare services to the local communities.’

The merger will generate cost savings as PHP's external manager Nexus will replace Octopus, its counterpart at MedicX.

Recommending the merger to shareholders, MedicX chairman Helen Mahy insists the transaction ‘will create a strong, new healthcare group which can deliver real benefits to doctors, the NHS, and the HSE in the Republic of Ireland as well as our shareholders. Both businesses share a similar focus on high quality, purpose-built primary healthcare assets and have complementary portfolios.’

DIVIDEND STEP-CHANGE

Mahy also enthuses that the merger ‘offers MedicX shareholders a premium to net asset value (NAV) as well as attractive accretion to earnings and dividends per share.’

John Cahill, a funds analyst at Stifel, explains: ‘MedicX has a highly complementary portfolio of healthcare centres, which will easily be subsumed into PHP’s existing management structures, in our view. Cost savings will total circa £4m per annum (£3m per annum released immediately, £1m per annum post operational merger). PHP remains committed to maintaining a fully covered dividend going forward. MedicX shareholders will in effect receive a 13.5% increase to their respective dividend payments versus last year.'


Issue Date: 24 Jan 2019