Netcare to dispose of its UK interests

Hospital group Netcare plans to exit the UK, joining a long line of South African companies that have had their fingers burnt by ambitious offshore ventures that failed to deliver on expectations.

Woolworths recently announced a R7bn write-down of its Australian business David Jones, and Famous Brands’s 2016 acquisition of Gourmet Burger Kitchen soured.

On Wednesday, Netcare said it had decided to dispose of its controlling stake in the UK’s biggest private hospital group, GHG, due to difficult trading conditions and its inability to negotiate a rent reduction despite five years of talks.

Netcare acquired GHG in 2006, which was subsequently restructured into an operating company called Opco or BMI Healthcare, and a series of property companies called PropCo that held the hospital properties and rented them to BMI Healthcare under long-term agreements. Those agreements included annual rent escalations of 2.5%, which have compounded over time.

Netcare now paid 20% of its revenue in rent to BMI Healthcare, which was the landlord for 35 of its 59 hospital properties, said CEO Richard Friedland.

Netcare had done the right thing when it invested in the UK, but the market had changed dramatically since then, he said.

The rental agreements were considered market-related at the time, but the global recession, exceptionally low inflation, and the decline in privatelyinsured patients meant they were no longer affordable.

“We have had to take the cold commercial decision to do what is in the best interests of our shareholders,” Friedland said.

Netcare had ring-fenced its UK and SA businesses, and so its debt obligations to BMI Healthcare and PropCo had no recourse to the South African operations, he said.

“Netcare has a great business in South Africa, which the market has been undervaluing due to the uncertainty in the UK market. I’m sure this wasn’t an easy decision to make, but we think it will be good for both the business and the share price,” said Investec portfolio manager Andrew Joannou.

Fairtree capital portfolio manager Jean-Pierre Verster said the market regarded the development as a positive one as investors had been concerned that Netcare might put further money into the UK.