Pass The Money Bags: Nova Needs Transfusion
Sydney Morning Herald
Monday May 12, 2003
Some vendors of hospitals bought by this group have done well. Investors haven't, writes Brian Robins.
Buy low and sell high is the maxim of most traders, and the Brown and Thynne families of the Gold Coast did just that when they sold a clutch of hospitals to Nova Health at the end of last year, generating an estimated profit of $20-30 million on assets mostly held for little more than a year.
That deal by Nova, coupled with poor trading at its other hospitals, has seen some of Sydney's top fund managers caught on the hop and bruised the egos of Nova's directors and senior management.
Nova raised $36 million by issuing shares to the public at $1 each. The float was put together just over a year ago to much fanfare by investment banker Tim Knapton. The shares are now trading at just 20c.
And there is worse to come, with a fundraising under way just as unhappy shareholders are calling for a board spill, targeting the chairman, Sydney broker Jim Dominguez, and managing director, Peter Wilkinson, along with other directors.
For Dominguez, it is almost a case of lightning striking twice.
One of his recent plays ended late last year with the winding-up of Ecom Communications. Launched in early 2001 with ambitious plans of going public once it was established, it is now just another faded dream.
Caught up in the wash of Nova's implosion are some of Sydney's better known fund managers: the likes of Ian Darling (Caledonia Investments), David Paradice (Paradice and Cooper) and Geoff Wilson (WAM Capital), along with Ozemail multi-millionaire, PowerTel saviour and former media executive Trevor Kennedy.
Most were quick to bale out when Nova got the wobbles and are now licking their wounds but some have hung on hoping for a revival which even the company concedes could be some way off.
Nova was the first big deal for Knapton's new investment bank, CSX Capital, now known as Equity Capital Markets. A handy underwriting fee of 5.5 per cent of the Nova raising of $36 million grossed Knapton and his associates $1.98 million.
While not fully comparable, the underwriting fee for the recent AMP jumbo issue, for example, was 2 per cent.
And the relationship with Nova is continuing since the renamed ECM advised Nova on the acquisition of HCA Southport a $61 million transaction centred on the Allamanda hospital on the Gold Coast, which is licensed for 268 beds, along with some smaller facilities. It was bought from the Brown and Thynne families.
The deal was to be a company-making transaction, giving Nova control of a trophy asset and clout when dealing with health funds leverage that has diminished among private hospital operators in the past few years.
Nova paid too much for the bunch of hospitals it bought when it went public in early 2002 a number of small suburban hospitals in Sydney and Melbourne including the Roma in Randwick and Concord's Westside hospital. There are also concerns it overpaid for HCA Southport, which has missed forecasts since joining the group.
When Nova went public, the assets were valued at $80 million, yet less than a year later it decided they were overvalued by a quarter.
Goodwill on the books of $31million at the time of the Australian Stock Exchange listing ballooned to $80 million after the Allamanda purchase. After a $20 million write-down earlier this year, it still stands at an onerous $60 million.
The largest part of the goodwill, at about $50 million, is HCA Southport whose vendors emerged with a 28 per cent stake in Nova and two board seats.
Since nearly all of Nova's acquisitions to date have been made for scrip, the pain of the collapse of its share price has been shared, although some of the original vendors did end up with $13.5 million in cash.
But now the knives are out, with some of the dissident shareholders, such as Frank Bruce, who sold the Longueville Private Hospital into Nova, requesting a shareholder meeting, to be held on June 20, to consider the board spill.
Along with seeking to remove Dominguez and Wilkinson as directors, the dissident shareholders want to oust two other directors, Nicholas Cunio and David Adler, who both sold hospitals into the Nova float last year.
Nova claims support of 25 per cent of the capital, which will help it to block the push for a board spill, although dissidents are likely to receive strong support because of the pain shareholders have endured since the float.
As well as paying too much for the initial suite of hospitals at the time of its float, Nova paid top dollar for HCA Southport. But the sellers, the Brown family (who originally made their money in coal in the Hunter Valley) and the Thynne family, are also suffering, since Nova shares they received at 90c have crashed in value.
When Mayne bid for Australian Hospital Care in 2001, the Australian Competition and Consumer Commission forced the divestiture of some hospitals, most notably Allamanda.
At the time, the Browns and Thynnes owned a medical facility nearby but were threatening to build a new general hospital. That deterred potential rivals from buying Allamanda and depressed the sale price to a super cheap $40 million.
As well as picking up Allamanda, the two families subsequently bought a couple of other private hospitals in the area, and late last year sold the package for a combined $100 million, generating a quick profit of $20-30 million.
Including debt, Nova paid $61 million for the operations of the hospitals, along with some of the underlying land and buildings. But the biggest slice of the hard assets, the land and buildings of Allamanda itself, were sold for $50 million into an unlisted property trust, Essential HealthCare, in which the Browns and Thynnes are cornerstone investors with a $10 million stake.
The yield on this trust is forecast at 10 per cent a handy annual return for the two families but a $4 million fixed cost for Nova. Some caution that this income may come under threat, given the financial pressures Nova is operating under.
The Browns and Thynnes ``took a turn of $20-30 million in a very short period of time", one Sydney fund manager says. ``That rang alarm bells."
The exact amount of the gain is unclear, because some of the facilities were upgraded between their purchase and subsequent on-sale.
Investment banker and Nova adviser Tim Knapton says: ``The size of the acquisition, instead of being the deliverance, compounded the problems for Nova.
``The families did take a turn, but took no cash they took shares, so [they] are suffering like everyone else," Knapton says.
``Mayne's sale was fire sale and the Thynnes owned two facilities opposite Allamanda. They owned a large block of land and were seeking development approval for a new hospital which scared off other bidders.
Knapton says their position had been so entrenched that they came out ``significantly ahead".
Nova managing director Peter Wilkinson says: ``What Nova discovered after its listing was that its portfolio of hospitals across Sydney and Melbourne did not . . . give it any muscle when dealing with health funds."
``As private hospital operators have found over the past few years, unless they operate some hospitals which have a regional `monopoly', they find it very hard to get a foot in the door when negotiating with health funds.
``For Nova, that essential asset proved to be the Allamanda."
Weighing on Nova's share price is concern that it paid too much for those assets and now needs to raise fresh capital so that it can reduce its gearing. Its debt of $57.1 million at the end of December was in line with shareholder equity of $56 million.
Still, if anyone knew the Allamanda asset it was Wilkinson, who worked for some time at Australian Hospital Care before Mayne Nickless bought it in 2001 after successive profit downgrades.
He went on to advise the Brown and Thynne families when they were looking at buying it from Mayne.
© 2003 Sydney Morning Herald