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Independent adviser KordaMentha backs Orion Health's $205M carve-up

Friday 7th September 2018

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Orion Health Group's plans to carve up its businesses then return capital through a share buyback is fair to minority shareholders who've seen their investment's value whittled away and probably better than any alternative, says independent adviser KordaMentha. 

The Auckland-based company outlined the plan in July to split up the business, selling the Rhapsody unit to UK private equity firm Hg for $205 million, dilute its stake in the population health management (PHM) unit, and retain full ownership of its hospitals division. After capitalising the joint investments, the remainder of the funds would be used to buy back shares at an estimated price of $1.16-to-$1.26, with the final price set by the board closer to the time.

That's lower than the $1.24-to-$1.29 per share estimate initially flagged, but still a premium to the current $1.10 trading price, which was up 1.9 percent so far today, and within KordaMentha's forecast valuation of  $1.15-to-$1.61. 

"With the benefit of a further two months since the original announcement of a higher estimated buyback offer price range, the directors have been able to further analyse the impact of the variables that could affect the level of cash available for the share buyback at the time it is able to be made," chair Andrew Ferrier said in his letter to shareholders. "In particular, the period required to satisfy the various conditions to the Hg transaction, and hence to close the Hg transaction, is uncertain, and therefore the timing of the share buyback could be delayed."

The company's 3,023 shareholders will vote on the proposals at the annual meeting on Sept. 28 in Auckland. 

KordaMentha's report concluded the deal was fair to shareholders not associated with founder Ian McCrae, letting "minority shareholders to exit Orion Health in an environment where the business is currently incurring significant cash losses and its share price has declined materially since listing at $5.70 on 2014."

While the estimated buyback is at the low end of the range, KordaMentha said it's still a significant premium to the 85 cents the shares traded at before the deal was announced, and that those valuations relied on forecasts from management that carried "inherent risks to Orion Health delivering on its growth plans, particularly in relation to PHM and hospitals’ future profitability."

The independent adviser's report said the positives for the Hg deal outweighed the negatives, and that a number of alternative transactions had been considered but rejected. Among those considered was a similar carve-up, except Orion retained Rhapsody and diluted McCrae's stake to 20-to-25 percent in exchange for the PHM and hospitals units. 

Irrespective of whether the deal goes ahead, Orion Health will quit its ASX listing due to the low trading volume and relatively high listing fees, and will review its NZX listing after the buyback to determine how many minority shareholders remain on the register. 

Ferrier said he and director Paul Shearer will resign as directors of Orion Health once the buyback is completed and new directors are identified to lead the company "through its next phase". 


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