Mediclinic forced to rein in its aspirations

Mediclinic has sort of nailed its colours to the Spire mast, so backing out of its bid may not prove to be a great idea in the long term.

It already holds 30% of the company and, by making the offer, has let the world know that it would like 100%. This means investors won’t believe Mediclinic has walked away for good. This in turn means the share price is unlikely to settle back at the levels it was trading at before Mediclinic launched its tentative bid in October.

The Spire share price hit a low of £2.30 in September, which must have looked too good to ignore for the Mediclinic guys, who paid £3.60 a share for their 29.9% stake just two years ago. There were some good reasons for the slump; a drop in referrals by the National Health Service (NHS) was just one of the factors behind a profit warning in September. The fall-off in business related to the public sector was not compensated for by a pick-up in private sector demand, which has been hit by post-Brexit economic conditions. In addition, Spire has had to set aside £27m to compensate the victims of a rogue surgeon.

Assuming the truly remarkable rogue surgeon problem is a one-off, the group’s operations should recover in time. The drop-off in NHS referrals can’t be sustained and inevitably, the British economy must recover.

Mediclinic’s acquisition-shy strategy is not too surprising right now. Its former blue-chip reputation suffered a hard knock after it struggled to bed down the high-profile Al Noor acquisition made two years ago.

The recent Swiss acquisition has also proved to be a disappointment. So the Spire hesitation is hardly surprising.

What’s not to like at Wescoal? After the recent acquisition of Keaton, this black-controlled miner looks a well-balanced outfit with viable footholds in the local and international thermal coal markets as well as coal merchant activities. Fundamentally, there has been a solid profit underpin for several years now, placing Wescoal in an enviable position (as junior miners go) with regard to regular dividend payments. Cash generated by operations was again reassuring at R206m in the half-year to end-September. This helped cull interest-bearing debt by a hefty R82m. There is considerable leverage for more deal making, with Wescoal clinching a longterm debt-funding arrangement of R440m with Nedbank.

The hitch is that Wescoal is probably not, at this stage, enthusiastic about mobilising its seemingly undervalued scrip to settle potential acquisitions. With interim earnings of more than 20c/share, the company is attracting a rather underwhelming market rating.

Although full-year revenues are likely to stretch past the R3bn mark, investors may want Wescoal to have more critical mass, operationally speaking, before delving into the share with any vigour.

Wescoal directors noted that “acquisition targets continue to present themselves”. One possible bulk-up deal could involve a merger with the profitable coal-mining operations of Hosken Consolidated Investments (HCI). This could offer HCI, which is controlled by the Southern African Clothing & Textile Workers Union, an opportunity to unlock value by placing its coal operations in a listed environment. Wescoal, presuming a scrip settlement can be negotiated, would enhance its empowerment credentials and have a large investor as a meaningful shareholder.