BOARD OF DIRECTORS STATEMENT

BOARD OF
DIRECTORS
STATEMENT
REGARDING THE
OPPORTUNITY AND
CONDITIONS OF
JOSÉ DE MELLO
SAÚDE, S.A. OFFER
24 September 2014
INDEX
1. INTRODUCTION .............................................................................................. 1
2. TERMS AND CONDITIONS OF THE COMPETING OFFER ........................... 4
3. OFFEROR’S STRATEGIC PLANS FOR ESS ............................................... 10
4. IMPACT OF THE COMPETING OFFER ON THE INTERESTS OF
EMPLOYEES AND THEIR WORKING CONDITIONS AND ON THE
LOCATIONS WHERE ESS OPERATES ....................................................... 17
5. TYPE AND AMOUNT OF THE CONSIDERATION OFFERED ...................... 21
6. INTENTIONS OF THE MEMBERS OF THE BOARD OF DIRECTORS
THAT ARE ALSO ESS’ SHAREHOLDERS ON THE ACCEPTANCE OF
THE COMPETING OFFER ............................................................................. 31
7. OTHER INFORMATION ................................................................................. 32
8. APPROVAL OF THE REPORT BY THE BOARD OF DIRECTORS.............. 32
9. SCHEDULE 1 ................................................................................................. 33
10. SCHEDULE 2 ................................................................................................. 35
1. INTRODUCTION
The Board of Directors of Espírito Santo Saúde – SGPS, S.A. (“ESS”), having received,
on 17 September 2014, and analysed, the draft prospectus and draft offer announcement
(“Draft Prospectus” and “Draft Offer Announcement”, respectively) for the general and
voluntary competing takeover offer for the acquisition of the shares representing the
share capital of ESS (“Competing Offer”), which was disclosed in a preliminary
announcement on 11 September 2014, (“Preliminary Announcement”), presented by
José de Mello Saúde, S.A. (“Competing Offeror” or “JMS”), hereby issues a statement
regarding the opportunity and conditions of the Competing Offer, as provided for and for
the purposes set out in number 1 of Article 181 of the Portuguese Securities Code
(“PSC”).
Considering that the preliminary announcement of the general and voluntary takeover
offer for the acquisitions of the shares representing the share capital of ESS announced
by JMS occurred after the disclosure of other preliminary announcement of general and
voluntary takeover of the shares of ESS on 19 August 2014 (“Initial Offer”) by the
Ángeles Servicios de Salud, S.A. de C.V. Group, (“GASS”), the preliminary offer
announced by the JMS on 11 September 2014 constitutes a competing offer, in
accordance with the Article 185 of the PSC, which states that, from the publication of a
preliminary announcement of a general takeover, any other general takeover offer over
the same class shares can only be carried out through a competing offer.
On 19 September 2014, following the reception of the Draft Prospectus and the
Preliminary Announcement of the Competing Offer by ESS, the Initial Offer by GASS was
registered and the respective prospectus and preliminary announcement were published.
It should be noted that, according to the preliminary announcement and prospectus of the
Initial Offer:
a)
the consideration offered in the Initial Offer is now in the amount of € 4.50 (four
Euros and fifty cents) per share; and
b)
the term set out for the Initial Offer period expires at 3:30 p.m. on 3 October 2014.
Therefore, the pursuit of the Competing Offer implies, at the moment, that JMS:
a)
reviews the consideration proposed, so it is at least 2% higher than the
consideration of the Initial Offer; and
b)
proceeds with the launch of the Offer until the fifth day prior to the end of the Initial
Offer period.
Following this, it was also disclosed, on 22 September 2014, another preliminary
announcement of a general and voluntary competing takeover offer for the acquisition of
the shares representing the share capital of ESS, by the company Fidelidade –
1
Companhia de Seguros, S.A., in which the consideration offered, to be paid in cash, is in
the amount of € 4.72 (four Euros and seventy two cents).
The Competing Offer is general and voluntary and the Offeror undertakes to purchase the
whole of the shares whose holders validly accept.
In summary, from the analysis of the Draft Prospectus and Draft Competing Offer
Announcement, the Board of Directors of ESS considers that:
(i)
Such as in the case of the Initial Offer, the success of the Competing Offer is
deemed to be a way of obtaining the necessary shareholder stability in ESS,
allowing the latter to resume its medium and long term strategic management, as
well as to normalise its relationship with the various stakeholders. However, the
increase leverage resulting from the Offeror’s implementation of the Competing
Offer and the current financial situation of the Offeror’s main shareholder are two
factors that could condition the above-mentioned objectives;
(ii)
There is a deemed strategic alignment between the Offeror and ESS, given that
the Offeror considers ESS’ strategic pillars to be appropriate;
(iii)
The consideration currently offered by the Offeror does not allow the pursuit of this
Competing Offer, seeing as the consideration of the Initial Offer was revised to
€ 4.50 (four Euros and fifty cents) per share. Nonetheless, even though the value
of € 4.40 (four Euros and forty cents) per share, proposed by the Offeror, fits
within the analysed market valuation criteria (price of IPO, share performance
since the IPO, multiples of listed peer companies and comparable transactions,
evolution of analyst outlooks from equity research and the comparison with the
consideration offered by GASS), may not fully reflect the potential control premium
and the benefit of the possible synergies resulting from the success of the
Competing Offer mentioned by the Offeror;
(iv)
The possible success of the Competing Offer shall entail a concentration of
companies, which will determine a change in the private healthcare services
provision market structure in Portugal, subject to the analysis of the Competition
Authority. The mentioned concentration appears to be capable of affecting the
various ESS’ stakeholders: on one hand, at the level of the current existing
scenario in relation to freedom of choice between the available alternatives, either
in respect of employers in the case of the employees, or providers of healthcare
services in the case of the clients/patients; and on the other, in what concerns the
current equilibrium in the insurance companies, healthcare systems and other
payers market.
2
This report was drafted based on the best information made available to ESS’ Board of
Directors, notwithstanding it can, in no way, replace the individual assessment required
from each shareholder in his/her decision-making process.
In the drafting of the present report, the Board of Directors was advised by Banco Espírito
Santo de Investimento, S.A. as its financial consultants and Linklaters LLP, Sucursal em
Portugal as its legal advisors.
The following documents are available for consultation by any interested party on the
website of the Portuguese Securities Commission (“CMVM”), whose address is
www.cmvm.pt, as well as on the website of ESS, whose address is www.essaude.pt:
•
Preliminary Announcement of the Initial Offer;
•
Preliminary Announcement of the Competing Offer;
•
Preliminary Announcement of the general and voluntary takeover offer for the
acquisition of the shares representing the share capital of ESS announced by the
company Fidelidade – Companhia de Seguros, S.A.;
•
Statement of the Board of Directors of ESS regarding the opportunity and conditions
of the Initial Offer;
•
Initial Offer Prospectus; and
•
Initial Offer Announcement.
3
2. TERMS AND CONDITIONS OF THE COMPETING OFFER
ESS’ share capital is represented by 95.542.254 ordinary nominative book-entry shares
whose nominal value is € 1.00 (one euro) each and which are admitted to trading on the
Euronext Lisbon regulated market managed by Euronext Lisbon – Sociedade Gestora de
Mercados Regulamentados, S.A. (“Euronext Lisbon”), with the ISIN code
PTEPT0AM0005 (“Shares”).
Offeror and Purchasing Company
According to the information contained in the Draft Prospectus and Draft Competing Offer
Announcement, the Offeror is José de Mello Saúde, S.A., incorporated under the
Portuguese laws, with registered office at Avenida do Forte n.º 3, Edifício Suécia III, piso
2, Oeiras and registered at the Commercial Registry Office of Cascais, under the single
registration and collective person 502884665 and features a fully paid-up share capital of
€53,000,000.00.
Also according to the Draft Prospectus of the Competing Offer, 65.85% of the Offeror’s
share capital is held by José de Mello SGPS, S.A., 4.15% is held by the Fundação
Amélia de Mello and the remaining 30% are indirectly held by the Associação Nacional
de Farmácias (National Pharmacy Association) (through Farminveste, S.A.).
The Offeror is integrated in the José de Mello’s Group (“JMG”) and operates in the
healthcare sector trough various healthcare facilities in the North of Portugal and Great
Lisbon regions, of which seven hospital units aimed at the provision of healthcare
services under medical or surgical hospitalisation and/or on an outpatient basis, five
outpatients clinics and one institute providing primary non-acute care and a imaging and
nuclear medicine unit, among other complementary activities to healthcare.
Type of Competing Offer
Since the preliminary announcement of the general voluntary takeover offer for the
acquisition of the shares representing the share capital of ESS published by JMS
occurred after the disclosure of the Initial Offer by GASS, the offer preliminary announced
by JMS on 11 September 2014 constitutes a competing offer, in accordance with the
Article 185 of the PSC, which states that, from the publication of a preliminary
announcement of a general takeover offer, any other offers over the same class shares
can only be carried out through a competing offer.
Furthermore, on 19 September 2014, following the reception by ESS of the Draft
Prospectus and the Preliminary Announcement of the Competing Offer by JMS, the Initial
4
Offer was registered and the respective prospectus and preliminary announcement were
published.
Subsequently, on 22 September 2014, another preliminary announcement of a general
and voluntary competing offer over the shares representing the share capital of ESS unit
was disclosed by company Fidelidade – Companhia de Seguros, S.A., in which it is
stated that the consideration offered, to be paid in cash, is in the amount of € 4.72 (four
Euros and seventy two cents).
Additionally, the Competing Offer is general and voluntary, covering the whole of ESS’
issued and circulating Shares. The Offeror undertakes to purchase the whole of the
Shares whose holders validly accept the Competing Offer.
Financial Intermediaries
The financial intermediaries appointed by the Offeror to advise on the Competing Offer,
namely by rendering the services necessary for the preparation, launch and execution of
the Competing Offer, are Banco Santander Totta, S.A and Caixa – Banco de
Investimento, S.A..
Shares targeted by the Offer
The shares targeted by the Competing Offer are the whole of the Shares representing the
share capital of ESS.
Conditions for the launch of the Offer
The launch of the Competing Offer is subject to the approvals, statements of nonopposition and administrative authorisations required under Portuguese law, namely:
a)
obtaining prior registration of the Competing Offer with the CMVM;
b)
statement of non-opposition by the Portuguese Competition Authority;
c)
obtaining the unconditional consent, or statement of non-opposition, by the
Portuguese State, represented by Ministry of Health and Regional Administration of
Health of Lisbon and Tagus Valley, I.P., for the change of control of the company
SGHL – Sociedade Gestora do Hospital de Loures, S.A and the company HL –
Sociedade Gestora do Edifício, S.A., through the indirect transfer of the shares
representing the share capital; and
d)
obtaining a statement from CMVM of the exemption of the duty to launch a
subsequent mandatory offer as result of the acquisition of Shares under the
5
Competing Offer, pursuant to subparagraph a) of paragraph 1 of Article 189 of PSC,
in favour of Offeror and the persons to whom the voting rights attaching thereto are
attributed, even if subordinated to the survival of the respective legal requirements.
Regarding condition of launch c), this Board of Directors recalls that under Clause 12 of
the Loures Hospital Management Agreement, entered into by the Portuguese State, as
the Contracting Public Entity, SGHL – Sociedade Gestora do Hospital de Loures, S.A.
and HL – Sociedade Gestora do Edifício, S.A., the shares of the referenced Managing
Entities are necessarily nominative and their transfer, whether between shareholders or
to third parties, is subject to the prior consent of the Contracting Public Entity, under
penalty of becoming null and void. Said clause further clarifies that any acts that result in
or that may possibly result in a change of control or of management of the Managing
Entities, such as a direct or indirect change in ownership of its share capital, are
encompassed by the said regime. Under the terms of Clause 19 of the Agreement, the
referenced prior consent shall be express and written and given within thirty days of the
presentation of the request, by joint ministerial order of the Ministries of Finance and of
Health.
On the 19 September 2014, GASS’ Initial Offer was registered and, in accordance with
Initial Offer’s offer announcement and prospectus, the consideration offered is now in the
amount of € 4.50 (four Euros and fifty cents) per share and the offer period expires at
3:30 p.m. on 3 October 2014.
Therefore, the launch of the Competing Offer implies that JMS:
a)
reviews the consideration proposed, so it is at least 2% higher than the
consideration of the Initial Offer; and
b)
proceeds with the launch of the Offer until the fifth day prior to the end of the Initial
Offer period.
The effectiveness of the Competing Offer is, in turn, dependent on the verification, until
the end of the Competing Offer period, on the following conditions:
1.
acquisition by the Offeror, until the end of the Competing Offer, of a total amount of
Shares that, when added to the Shares detain by other entities that are, or will be
with the Offeror, on that date, in any of the circumstances mentioned on number 1
of Article 20 of the PSC, provide him 50.01% of voting rights correspondent to the
share capital of ESS;
2.
obtaining the unconditional consent, or statement of non-opposition, to the transfer
of the Shares and to the indirect transfer of the shares representing the share
capital of ESS’ subsidiaries by certain private financing banks in the context of
financial contracts with change of control clauses, as stated on the Shares’ IPO
prospectus, of 24 January 2014.
6
On the date of this report, the Board of ESS is not aware if the satisfaction of the
condition 2, herein identified, is satisfied.
It should be noted that, according to Article 185(5) of the PSC, not only does the
consideration proposed by JMS needs to be reviewed, in order to satisfy the minimum
limit set out in that Article, but also the Competing Offer cannot include conditions which
make it any less favourable than the Initial Offer.
In this context, is should be noted that GASS’ Initial Offer, as registered on 19
September, subjects the effectiveness of the Initial Offer to only one condition: the
acquisition by the acquiring company, in the Initial Offer, of a number of Shares
representative of, at least, 50.01% of the share capital of ESS. Therefore, between the
preliminary announcement of the Initial Offer and the offer announcement disclosed on
19 September, GASS stopped conditioning the effectiveness of the Initial Offer to, among
others, the obtainment of the unconditional consent or statement of non-opposition to the
transfer of the Shares or to the indirect transfer of the shares representing the share
capital of ESS’ subsidiaries by certain private financing banks, in the context of financial
contracts with change of control clauses.
As the Initial Offer was registered on the above-mentioned terms, it is up to JMS to
ensure that the conditions which it will impose to the Competing Offer will not make it less
favourable than the Initial Offer, trough, inter alia, the satisfaction before registration of
the Competing Offer or the elimination of the above mentioned condition 2.
The Offeror further listed in the Preliminary Announcement, in the Draft Offer
Announcement and in the Draft Prospectus of the Competing Offer, a set of assumptions
concerning the decision to launch the Competing Offer (see paragraph 16 and 20 of the
Preliminary Announcement of the Competing Offer). Under these assumptions, it is also
assumed in the Competing Offer, as determined in the Preliminary Announcement, in the
Draft Offer Announcement and in Draft Prospectus of the Competing Offer, "the absence
of any (i) material change to the national and international financial markets and to their
respective financial institutions, not reflected in the official scenarios disclosed by the
Eurozone authorities, or (ii) in the markets in which the Offeror and the Target
Company operate, and that has a material adverse effect on the Competing Offer or in
Target Company’s activity, by exceeding its inherent risks” (ESS’ highlight).
For the purposes of Article 185(5) of the PSC mentioned above, it should be noted that
the corresponding assumption to the one above cited in GASS’ Initial Offer reads as
follows: "the absence of any material change in the national and international financial
markets and to their respective financial institutions, not reflected in the official scenarios
disclosed by the Eurozone authorities and that has a material adverse effect on the Offer
by exceeding its inherent risks." Comparing the wording of both assumptions it should be
noted that JMS’ assumption in relation to a material change in the markets includes the
7
markets in which either JMS or ESS operate (a somewhat indeterminate concept,
moreover), which does not occur in GASS’ Initial Offer.
Consideration
The consideration offered by the Offeror is € 4.40 (four Euros and forty cents) per Share,
an amount which is "deducted from any (gross) amount that may be attributed to each
Share, whether as dividend, advance payment of year-end profits, distribution of reserves
or other, such deduction being made at the time the right to the amount in question has
been detached from the Shares and if such occurs prior to the financial settlement of the
Competing Offer" (the "Consideration ").
However, as the value of the consideration of the Initial Offer is now set at € 4.50 (four
Euros and fifty cents) per share, if JMS intends to proceed with the Competing Offer it
should review the consideration proposed in order to make it at least 2% higher than the
value of the Initial Offer’s consideration.
The Consideration as proposed would be paid in cash.
According to the Draft Prospectus, "The total amount of the consideration is guaranteed
as provided for under number 2 of Article 177 of the Portuguese Securities Code." As
stated in the Competing Offer’s Draft Prospectus, the Offeror shall deposit with Banco
Santander Totta a global amount to be determined, which corresponds to the portion of
the Competing Offer financed with the Offeror’s funds, and the remaining amount will be
covered by an undertaking to pay assumed by a bank syndicate composed by Banco
Santander Totta, Caixa Económica Montepio General, Caixa Central de Crédito Agrícola
Mútuo, C.R.L. and Banco BIC Português, S.A. and issued on the basis of a credit facility
agreement agreed between the bank syndicate and the Offeror, governed by Portuguese
Law and subject to the Portuguese Jurisdiction.
Offer period and minimum number of Shares to be purchased
The Competing Offer’s Draft Prospectus does not contain yet a definition of the offer
period.
The Offeror made the Competing Offer conditional on the purchase, in the Competing
Offer, of a number of Shares representing at least 50.01% of ESS’ share capital.
The result of the Competing Offer will be determined at a special session of the regulated
market of Euronext Lisbon, planned for a date yet to ascertain. The respective physical
and financial settlement will take place on the third business day following the special
session.
8
Public company status
The Offeror has stated that in case it reaches or exceeds, either directly or as provided
for under Article 20 of the PSC, (i) 90% of the voting rights attached to ESS’ share capital
and (ii) 90% of the voting rights encompassed by the Competing Offer, as a result of the
Competing Offer or other lawfully transactions which are relevant to the calculation of the
said percentage, it will make use of the squeeze-out mechanism set out in Article 194 of
the PSC which allows the acquisition of the remaining Shares within the three following
months.
The Offeror also stated that, even if the assumptions referred above are not verified, but
the Offeror holds at least 90% of the voting rights attached to ESS’ share capital
calculated in accordance with Article 20 of PSC, as a result of Competing Offer, it will
request to the CMVM, within six months from the closing of the Competing Offer, the loss
of public company status by ESS, as provided under Article 27(1)(a) of the PSC and will
use the mechanism of squeeze-out of the remaining Shares under Article 490 of the
Commercial Companies Code.
Finally, the Offeror further reserved itself the right, in case of not holding, as a result of
the Competing Offer, at least 90% of the voting rights attached to ESS’ share capital, but
90% of its share capital, to make use of Article 27(1)(b) of the PSC, i.e., by passing a
resolution in the General Meeting taken by a majority of not less than 90% of ESS’s share
capital, resolving the loss of public company status by ESS, and subsequently make use
of the mechanism of squeeze out of the remaining Shares under the mentioned Article
490 of the Commercial Companies.
The Offeror’s exercise of the rights referenced in the preceding paragraphs entails the
immediate delisting of the Shares from the regulated market of Euronext Lisbon, being its
readmission barred for a one-year period, although there may be instances where the
remaining shareholders are hindered from making use of the squeeze-out mechanism set
out in Article 194 of the PSC.
Statement of interest on the part of ESS’ shareholders
ESS’ shareholders that intend to accept the Competing Offer should state such interest
during the Competing Offer period through sell orders issued through their broker
companies, broker-dealer companies and at the branches of the financial intermediaries
eligible to render securities registration and deposit services.
9
3. OFFEROR’S STRATEGIC PLANS FOR ESS
Opportunity of the Competing Offer
Because ESS is a company mainly owned by companies of the Espírito Santo Group, it is
presently in an uncertain situation concerning the future of its controlling shareholders.
ESS’ Board of Directors considers that, such as in the case of the Initial Offer, due to this
context, the Competing Offer through which the Offeror proposes to purchase the whole
of ESS’ share capital, is deemed to be a way of increase the shareholder stability.
However, in this context, it is necessary to carry out two important analyses on the
Competing Offer: (i) an analysis of the financing structure proposed by the Offeror, and
(ii) an analysis of potential consequences on the configuration of the ESS’ units and
services before the possible competitive environment resulting from the completion of the
Competing Offer.
I.
Analysis of the financing structure proposed by the Offeror
According to Draft Prospectus submitted by the Offeror, the acquisition of ESS, if
implemented at 100% will be financed in 1/3 (one third) by “funds of the Offeror" and
in 2/3 (two thirds) through "financing".
ESS’ Board of Directors considers that:
i)
it is not clear whether the "funds of the Offeror" contributing to the financing of
the acquisition, result from a capital increase of the Offeror or from allocation of
the cash balance of the Offeror for this purpose;
ii)
based on the latest financial indicators (June 2014) on the Offeror and the
Target Company, the ratio commonly used by the market to gauge the level of
leverage of a company, i.e., the Net Debt / EBITDA ratio results in 4.4x, in the
case of a capital increase of the Offeror, or in 5.5x, in case of allocation of
resources of the Offeror, as set out above. Still, if the most conservative
scenario is considered, an indebtedness of 4.4x EBITDA is about 33% above
the sector median (3.3x EBITDA), considering the Net Financial Debt / EBITDA
ratios of comparative listed companies (see table in Annex 1);
iii)
the financing of the acquisition has a significant impact on the ability of the
company resulting from the merger between the Offeror and the Target
Company, to release sufficient cash flows, to enable the development of the
strategic plan set by the Target Company. It is noted that the expansion plans
10
announced by ESS for the next three years planned to absorb all of the cash
flows generated by the Target Company;
iv)
the above-mentioned limitations could have only a relative importance in the
achievement of the objectives of the Target Company, if the main shareholder
of the Offeror presented a low level of leverage. However, as far as is publicly
known, the José de Mello Group had, on 31 December 2013, € 5.5 billion of net
debt, which corresponds to a ratio of financial autonomy of only 6.5%.
For the reasons explained above, it appears to the ESS’ Board of Directors that the
increase of indebtedness of the Offeror resulting from the implementation of the
Competing Offer and the current financial situation of the main shareholder of the
Offeror are two factors that could adversely impact on the recovery by the ESS of its
strategic management in its medium and long term, going beyond the current
management, for the purpose of pursuing the development of its expansion plans
already announced, as well as the normalization of relations with the various
stakeholders, in particular for the returning to the financial market without restrictions.
II.
Analysis of the potential consequences to the competitive environment of the
completion level of the Competitor Offer
The Offeror controls a group operating in the health sector, including hospitals and
other units which provide services in this area. Thus, the potential acquisition of ESS
by the Offeror will configure a merger, subject to approval by the competition
authorities responsible under applicable law.
Given the size and geographical location of some of JMS’ hospitals, when analysed in
conjunction with the ESS, the Competition Authority is likely to trigger a process of
further investigation.
In view of the Competing Offer submitted by JMS, the Competition Authority, following
the merger control process mentioned above, may require some additional conditions
for the approval of the transaction that may turn out to be adverse to ESS’ interests
and of its stakeholders.
Given the practice of the Competition Authority, the determination of the conditions
that may eventually come to be applied is made taking into account the market share
that the Offeror and ESS have through the establishments and services offered by
both groups, in the geographic area where such establishments are located.
In this scenario, one of the conditions which may be imposed could be the disposal of
the establishments held in the respective geographical areas where there is a
11
concentration or, eventually, the provision of some services in those units in
conditional terms.
In principle, in case some of these conditions are imposed, if the disposition
determined by the Offeror were to focus on the ESS’ units or any conditions are
imposed for the approval of the acquisition of control in ESS by JMS that affect or
restrict the provision of services in health units belonging to the ESS universe, such
conditions will impact on ESS’ activity
Purpose of Acquisition
The Board of Directors notes that the Offeror presents as acquisition purposes: i) creation
of an internationally reference operator with a national basis; ii) enhancement of the
quality of the healthcare services provided to the citizens; iii) oppose the structural trend
of increasing costs in the healthcare sector; iv) increasing the attractiveness for
healthcare professionals and the investment in medical training; v) provide ESS with a
stable and transparent shareholder structure, with a national base; and, vi) strict
compliance with the commitments undertaken under the Public-Private Partnerships
(“PPPs”) entered into with the Portuguese State.
I.
Creation of an internationally referred operator with a national basis
The Offeror stated in the Draft Prospectus that "the combined revenues of the
Target Company and the Offeror shall compare with some of the major European
operators in the health services sector (...) Still, the size of the new entity will not
exceed about 8% of the market of provision health care services in the national
market." The Board notes that, although the market share in terms of operating
revenues from the resulting business between the Target Company and the
Offeror (the "Resulting Business") reaches about 8%, when analysing the
healthcare services provision national market (public and private sector), there are
changes at the public and private sector levels.
Regarding the public sector, despite the small market share, it seems relevant to
note that the Resulting Business would result in one sole operator holding three of
the four PPPs in operation.
In what concerns the private sector level, the Resulting Business would result
(based on the financial information of end the of 2013) in operating revenues 4.5
times higher than the second largest private operator in the market (HPP Group)
and 12.2 times higher than the third largest private operator in the market (Trofa
Group). This is likely to impact the current market equilibrium moreover at the
insurance companies’ level and other payers, but also to the suppliers. The
Resulting Business would result, in particular, in an increase of the market share
12
in the segment of private hospitals in the Greater Lisbon Area (Grande Lisboa)
and Greater Porto Area (Grande Porto).
II.
Enhance the quality of the healthcare services provided to the citizens
The Board of Directors has noted that the Offeror states in the Draft Prospectus
that “the acquisition of the Target Company and the business integration will result
in a significant increase of the quality of the services provided to the citizens.
There is a set of aspects that will have a positive impact in the level of the
services provided, in particular those referred to thereinafter. Firstly, there will be a
greater ability to develop services in geographical areas where neither ESS nor
JMS have the ability to invest, given the lack of critical mass to justify the
investment. Furthermore, the congregation of know-how and capacity to deliver
will allow to test and to develop the provision of new healthcare services, notably
in the segment of those chronically ill”. The Board of Directors understands that
there may be a potential to enhance the quality of the services provided through
the sharing of best practices between the Offeror and ESS.
The Offeror also states that “the business integration will increase the ability to
invest in cutting edge technology and equipment, which will result in both a
greater and better diagnostic and treatment capacity and the decrease of the
citizens’ demand for differentiated treatments abroad” and “such combination will
stimulate the share and crosscutting introduction of the best clinical and services
management practices”. The Board of Directors understands that the effects
referred to by the Offeror as a result of the integration of both groups are valid,
adding that the Resulting Business will entail greater levels of utilization of existing
assets of each one of the groups, through the increase of the volume of cases
that require such treatments.
III.
Oppose the structural trend of increasing costs in the healthcare sector
It is mentioned in the Draft Prospectus that the “Offeror presents levels of
efficiency which have obtained public recognition, for instance in the costs’
rankings for hospitals in the NHS. According to the research made by ACSS in
2013 (September), the treatment of the standardised patient costs 2 230 Euros in
Braga Hospital, the lowest value amongst 31 hospitals and hospital centres which
perform services as “Entidades Públicas Empresariais” or Public-Private
Partnerships. The same research also refers that Braga Hospital has the medical
staff with the greater productivity index amongst the national hospitals and the
nursing staff with the greater efficiency index amongst the hospitals with its size
and complexity, from a national perspective. The integration will consolidate such
levels of efficiency, either in the productivity segment or in the costs optimisation”.
13
The Board of Directors agrees that the Resulting Business of the two healthcare
groups with such a size may result in potential increases of efficiency.
Nevertheless, based on the benchmarking research performed by the Central
Administration of the Health System (Administração Central do Sistema de
Saúde, I.P.), on September 2013 on the National Healthcare Service’s hospitals,
mentioned by the Offeror, the Board of Directors wishes to emphasise that the
hospitals under a PPP regime should be compared with the hospitals of the group
in which they are a part. Thus, when analyzing Hospital Beatriz Ângelo (ESS), the
latter presents the lowest operational costs per standardised patient of its
comparable group (€ 2,312 per standardised patient), a value 20.0% lower than
the median of its comparable group (Group C).
IV.
Increasing the attractiveness for healthcare staff and the investment in medical
training
The Offeror states that “the acquisition of the Target Company will allow the
dilution of costs associated to this type of training and integrate the training
programs in a more efficient way, which means it will be possible to support an
increasing number of Portuguese doctors in terms of research and professional
development”. The Board of Directors has the investment in training and
professional development as one of the pillars of its activity. Furthermore, it
agrees that the Resulting Business will allow the achievement of economies of
scale and knowledge in this specific area, though the emphasis should be in the
development of a comprehensive, distinctive and differentiated offer, founded in
the existing experience in both groups and with potential to create value beyond
the limits of the combined group.
V.
Provide ESS with a stable and transparent shareholder structure, with a national
base
The Offeror states in the Draft Prospectus that the “difficult financial situation of
the Luxembourgish company which indirectly holds 51% of the Target Company
is, as it is known, source of uncertainty and instability for the development of a
coherent and value added strategy. The success of the Competing Offer will allow
the Target Company to obtain shareholder stability, providing it with a transparent
and national control structure. Thus the Target Company will be provided with all
the conditions for following the course and strategy to be implemented after the
Offer, benefiting from a stable shareholder’s support for that purpose”.
As mentioned above, as ESS is a company mainly owned by companies of the
Espírito Santo Group, it is presently in an uncertain situation concerning the future
of its controlling shareholders.
14
ESS’ Board of Directors considers that, due to this context, the Competing Offer
through which the Offeror proposes to purchase the whole of ESS’ share capital,
is deemed to be a way of obtaining the necessary shareholder stability.
Nevertheless, and as already mentioned above, the increase in debt by the
Offeror as a result of the conclusion of the Competing Offer and the current
financial situation of the main shareholder of the Offeror are two factors which
might have a negative impact in the return by ESS to its medium and long term
strategic management in addition to its current course of business through the
continued development of its previously announced expansion plans and in the
normalisation of its relationship with the various stakeholders, in particular the
unrestricted return to the financial market.
VI.
Strict compliance with the commitments undertaken under the Public-Private
Partnerships entered into with the Portuguese State
The Offeror states it intends to comply with all commitments undertaken before
the Portuguese State under the Loures Hospital Management Agreement
whereby one of the companies held by ESS (SGHL – Sociedade Gestora do
Hospital de Loures, S.A.) is in charge, under a PPP regime, of the management of
the Beatriz Ângelo Hospital in Loures, a hospital integrated in the National Health
System.
ESS’ strategic aspects to be implemented within the Resulting Business
The Board of Directors notes that there it seems to be an alignment between the Offeror
and ESS in relation to a central core of operational principles, namely concerning “clinical
high standards and excellence of the services provided to the customers”. In the Draft
Prospectus, the Offeror highlights that “this operation is not a consolidation in a mature
market and, as a consequence, based on an operational restructuring, but rather the
integration of two operators with the ability to provide an answer to a market with a
significant growing potential” and that it “considers that a jointly defined strategy will allow
ESS to pursue the strategic pillars inherent to its strategic vision with a strengthened
capacity to achieve them”, as well as “the financing plans which have been in the origin of
this acquisition have taken into account the implementation of the projects mentioned by
ESS in its Prospectus for the public offer of distribution and admission to trading of the
Shares”.
The Board of Directors considers that the market of which both the Offeror and ESS are
part has growing potential, but understands that, as previously stated, the Offeror may
not have the financial capacity required to allow the entity resulting from the successful
conclusion of the Competing Offer to invest in order to benefit from such growing
potential, notably through ESS’ expansion projects, which have already been announced
15
to the market (which are briefly described in the prospectus for the public offer of
distribution and admission to trading of the Shares, dated 24 January 2014, available on
the CMVM website (www.cmvm.pt) and in ESS’ website (www.essaude.pt).
Nonetheless, from the Draft of Prospectus of the Offer it seems to exist a strategic
alignment between the Offeror and ESS, given that the former considers ESS’ strategic
pillars as appropriate:
•
Continuous improvement of ESS’ main business and commitment to the provision of
high standard healthcare services;
•
Enhance the efficiency and productivity between ESS’ business segments and
healthcare units;
•
Increase the coverage and penetration in Portugal;
•
International expansion of ESS’ services.
Lastly, the Offeror describes itself as having size, experience and capacity in the
healthcare services sector, in addition to the necessary know-how in ESS’ business
areas, indicating alignment in relation to the main strategic features to be implemented,
notably:
•
Enhance the clinical quality (…);
•
Develop excellence centres (…);
•
Service of excellence (…);
•
Expand the national geographical coverage (…);
•
Enhance the internationalization potential (…);
•
Efficiency in benefit of the system (…).
16
4. IMPACT OF THE COMPETING OFFER ON THE INTERESTS OF
EMPLOYEES AND THEIR WORKING CONDITIONS AND ON
THE LOCATIONS WHERE ESS OPERATES
Employees
ESS’ Board of Directors considers the repercussions of an offer on the interests of its
employees, in particular on their stability and working conditions, as well as their
professional development to be a crucial factor in any offer.
The Offeror mentions it does not foresee the need to change working conditions nor to
significantly reallocate employees, since it intends to continue to operate and conduct
ESS’ business from its existing premises, which are properly dimensioned. Such intention
of the Offeror is stated in the following excerpts of the Draft Prospectus:
“It is important to remember that JMS has been marked by the creation of qualified jobs
and business growth, without jeopardizing the existing jobs. The proposition for the
integration of businesses between the Target Company and the Offeror is, therefore, an
attractive proposition of value and does not intend to threaten the existing jobs.
“The existing units comprised within the groups headed by the Target Company and the
Offeror are properly dimensioned and equipped for the provision of services, thus it is not
foreseen that any relevant changes in the working conditions may occur nor that there is
a need to perform a significant reallocation of employees.
“A more efficient management of corporate centres may lead, in particular, to the
avoidance of the execution of contracts with new employees for those activities, including
in case of new investments.”
The Board of Directors understands that, notwithstanding the appropriate dimension of
the healthcare units’ human resources of both groups, the Resulting Business may lead,
in the short term, to duplication of jobs especially in the corporate centre of the groups, as
well as in the healthcare units’ administrative and/or support roles and directive roles in
the units. In the short term, the growth of the group derived from the Resulting Business
may be not sufficient to tackle such duplications which may result, from the Board of
Directors’ perspective, in job losses. Additionally (or alternatively to said job losses), the
duplication of jobs may cause significant changes in the involved employees’ role, with
the consequent professional “downgrading” (even if not formal).
Specially, regarding healthcare professionals, the Offeror mentions that “the integration of
both operators will allow to strengthen the value proposition to the clinical staff by means
of medical training, differentiation opportunities through sub-specialisation and access to
cutting edge clinical equipment. It should be noted JMS was pioneer in the training
17
segment and has been playing a role in the improvement of the State’s actions on this
regard, by extending the training of doctors on internship to private operators and, this
year, by awarding doctoral grants to Portuguese doctors. Implementing this operation,
through a dilution of costs, will allow the support of an increasing number of Portuguese
doctors in their relevant pre or post graduation training.”
The Board of Directors understands that, should the Competing Offer be successful, this
positioning of the Offeror concerning professional and academic training could leverage
what already occurs in the ESS group units to the scale increase effect. Nevertheless, the
Board of Directors understands that the successful conclusion of the Competing Offer
may hinder the current scenario in which the doctors, nurses and health technicians
exercise their freedom of choice in relation to their employers, as the negotiation power of
the entity resulting from the Resulting Business will be boosted.
Clients / Patients
Given the aligned strategy, as well as both ESS’ and the Offeror’s market positioning, the
Board of Directors expects that the quality of the services rendered, as well as the level of
client service of the various ESS units will be maintained, should the Competing Offer be
successful. The following excerpt from the Draft Prospectus supports this:
“With this operation clients/patients will benefit from an increase of access to better
healthcare services, with functionalities which provide them an answer to their needs and
demands and in geographical areas where until now neither the Offeror nor the Target
Company had the capacity to invest given the lack of critical mass”.
However, the board of Directors considers that a possible successful conclusion of the
Competing Offer may hinder the current scenario in which the clients / patients may
exercise their freedom of choice in relation to the providers of healthcare services.
Insurance Companies / Healthcare / Payers and Suppliers
In light of the stated shared strategic vision of the Offeror and ESS, as well as the
agreement stated by the Offeror in the Draft Prospectus of the Competing Offer with ESS’
management model, no impact on the current relationship with healthcare / payers and
suppliers (actual and potential) is expected.
Nevertheless, the Board of Directors further considers that the success of the Competing
Offer may have an impact in the current balance of the insurance market and other
paying entities, insofar as it will involve a concentration of companies that would increase
ESS and the Offeror’s market power (by means of the entity resulting from the Resulting
Business) towards such insurance companies and other payers.
18
Regarding the suppliers, the Offeror states that “considering that the top ten list of
suppliers comprises medicines and consumable health products’ international operators,
which negotiate with several services providers, a great number of which are international
services providers with a turnover exceeding a billion Euros (from a national perspective,
a situation similar to the State as a services provider), the integration of the two operators
will have no impact in the existing agreements”. The Board of Directors considers that,
notwithstanding the dimension of the entity resulting from the Resulting Business when
compared with European operators as well as with the State, the conclusion of the
Competing Offer may have an impact especially in relation to smaller national suppliers.
State
The Offeror states it intends to comply with all commitments undertaken before the
Portuguese State under the Loures Hospital Management Agreement whereby one of the
companies held by ESS (SGHL – Sociedade Gestora do Hospital de Loures, S.A.) is in
charge, pursuant to a public-private partnership, of the management of Hospital Beatriz
Ângelo in Loures, a hospital integrated in the National Health System.
It follows as regards this particular aspect that the Competing Offer is deemed neutral for
the public segment of ESS.
However, the success of the Competing Offer would reduce the exposure of the State to
different management models and its capacity to ascertain the best practises e to
promote innovation, seeing as the four hospitals management under the public-private
partnership would be managed by only two private operators.
Financing entities
The Offeror has stated its intention to maintain the financing policies and strategies of
ESS and, therefore, no significant changes are expected to the existing relationships
between ESS and the financing banks. In this context, the following excerpt from the
Draft Prospectus is pertinent: “The JMS has a long-term relationship with most of the
current ESS financing entities, therefore it will have the ability to maintain the approach
followed by the Target Company, namely as to the financing costs reduction component,
appropriate level of working capital and continuity of existing agreements strategies. The
financing plans supporting this purchasing transaction took this into account the
implementation of the projects announced by ESS in its Prospectus for the public
distribution offer of Shares”.
However, the Offeror states that “The funding made available under the credit facility
agreement entered into for the payment of the consideration due to the acceptance of the
19
Competing Offer shall be repaid within no more than 60 months, and it establishes terms
and conditions common to this type financing, such as (…) restrictions to indebtedness,
negative pledge, restrictions at the level of the disposal of assets and Shares, and of the
acquisitions transactions not related to current course of business and corporate
restructuring or transforming transactions (except for any merger transaction between the
Offeror and the Company) (…)”. The Board of Directors highlights that, considering what
was stated above about the Offeror and its corporate group, in “Analysis of the financing
structure proposed by the Offeror” (Chapter 3), that may impinge upon the debt capacity
of the corporate group resulting from the Resulting Business to face the expansion plans
already announced by ESS to the market. These are plans known by the Offeror and
which the latter intends to ensure in case the Competing Offer succeeds, as mentioned in
the Draft Prospectus.
20
5. TYPE AND AMOUNT OF THE CONSIDERATION OFFERED
ESS’ Board of Directors considers the offered amount of €4.40 (four Euros and forty
cents) does not enable the Competing Offer to subsist, as the consideration of the Initial
Offer was revised to € 4.50 (four Euros and fifty cents) per share. Nevertheless, it should
be noted that the offered amount of €4.40 (four Euros and forty cents) per share might
not reflect ESS’ potential long term intrinsic value.
Concerning the opinion on the price of the Competing Offer, the Board of Directors took
various factors into consideration:
•
Price of the Initial Public Offering (IPO);
•
Share performance since the IPO;
•
Listed peer companies and transactions;
•
Evolution of the outlooks of the Equity Research analysts;
•
Potential creation of value accruing from the Resulting Business of ESS and JMS.
Price of the IPO
The price offered is higher than the sale price in the IPO (€3.20) by nearly 38%.
ESS’ ITF (intention to float) was disclosed on 14 January 2014, the price range
determined on 24 January (€ 3.20 - € 3.90) and the roadshow and offer period took place
between 27 January and 6 February 2014. The determination of a price range in an IPO
serves the purpose of attracting the interest of the widest array possible of investors (due
to the amplitude of the price range), thereby maintaining a sufficient level of demand even
during periods of high volatility with sharp falls in the market, a scenario in which it is
possible to set the price at the lower end of the range and, on the other hand, to obtain a
price closer to the intrinsic value of the company, if the market were to become more
positive.
The offer period of the IPO and subsequent determination of the price at the end of this
period took place during the last two weeks of January and the first week of February
2014, during which time there was an increase in volatility in the financial markets and an
aversion to risk on the part of investors, specially due to fears related to instability in
some emerging economies and which are considered to have had a negative impact on
the price of the IPO. In fact, this environment translated into a penalization of risk assets
(sharp falls in equity markets, depreciation of the currencies of emerging nations) and a
21
higher demand for refuge assets (receding Treasuries and Bunds yields) and an increase
in volatility.
Share price evolution of peer companies and indexes in the period prior to the IPO (12
February 2014)
Share performance
L3M
L6M
ESS peers
(8.4%)
(9.0%)
(4.1%)
8.1%
(7.0%)
(1.6%)
PSI 20
(0.7%)
6.4%
16.8%
8.9%
(5.1%)
(1.0%)
DJS 600
(2.9%)
(1.5%)
4.4%
11.4%
(4.1%)
(2.2%)
0.3%
2.8%
6.1%
16.4%
(0.6%)
(0.1%)
DJ Stoxx Healthcare
L12M
Since ITF
Since
beginning of
roadshow
L1M
Source: FactSet 5 February 2014. ESS peer companies is an average of the following companies: Aevis, Al Noor, Clinica Baviera, Genérale
de Santé, IHH, Life Healthcare, Mediclin, Mediclinic, MD Medical, Netcare, NMC Health, Ramsay, Rhoen Klinikum.
It follows that the price of the IPO was determined in a fairly negative market climate
which required the price of the IPO to be set at the minimum value of the price range, i.e.
€3.20 (three Euros and twenty cents). Additionally, the transaction was a sale of a
minority shareholding (49% of ESS), which entails in of itself a discount higher than those
usual in IPOs where control is transferred.
Share performance since the IPO
From the IPO until the Preliminary Announcement of GASS Initial Offer, ESS showed a
market performance much superior to the main market benchmarks, in particular to the
European, Portuguese and Spanish markets.
However, ESS’ share price has been very volatile since the end of June in line with the
Portuguese market, mainly due to the instability created by the beginning of the crisis in
the Espírito Santo Group.
Prior to this more volatile period, ESS followed the trend in the main indexes.
The price offered represents a premium of nearly 12% as compared to the closing share
price on the day the Preliminary Announcement of GASS Initial Offer was disclosed and a
premium of 18% to 23% in relation to the volume weighted average price (VWAP) of
ESS’ shares in the three and six months prior to the GASS Initial Offer.
Considering the three month period in which ESS’ share price was not influenced by
extraordinary external factors, i.e. considering the three months until 30 June (second
quarter of 2014 as standard period), the consideration offered represents a premium of
20% compared to the weighted average share price (VWAP1) of ESS.
22
Implicit premium of the Offer in relation with several indicative prices, compared with the
th
Preliminary Announcement date (19 August 2014)
Since IPO
last 6 months
(19 Feb. - 19
Aug.) pre-Initial
Offer from GASS
3 months
normalized (31
Mar. to 30 Jun.)
last 3 months
(19 May. - 19
Aug.) pre-Offer
from GASS
last price pre-Initial
Offer from GASS2
VWAP1 ESS (€)
3.490
3.592
3.671
3.718
3.943
Premium offered
by JMS
26%
23%
20%
18%
12%
Source: Bloomberg.
(1) The calculation of the Volume Weighted Average Price – VWAP – was executed based on the price of each transaction
performed at the Euronext Lisbon regulated market during the abovementioned period. Prices are rounded to the third
decimal place.
(2) Last traded price at Euronext Lisbon regulated market before the Offer announcement (19 August 2014)
Evolution of ESS performance and selected indexes since the IPO
GASS Revised Offer €4.50
JMS Offer €4.40
GASS Initial Offer€4.30
45%
30%
15%
0%
11-Feb-14
11-Mar-14
11-Apr-14
11-May-14
11-Jun-14
11-Jul-14
11-Aug-14
11-Sep-14
-15%
-30%
DJS Healthcare
DJS 600
PSI20
IBEX35
ESS
Source: Bloomberg
23
ESS performance compared with several benchmarks until the date of the preliminary
announcement of the Initial Offer by GASS (19 August 2014)
6 months prior to the
Offer
Since the IPO
23%
ESS
Stoxx
Healthcare
22%
8%
IBEX 35
3%
Stoxx
Europe
2%
PSI-20
-19%
3 months prior to the
Offer
8%
5%
2%
3%
0%
0%
-1%
-21%
-17%
Source: Bloomberg
Evolution of ESS performance and selected indexes since the IPO
GASS Revised Offer €4.50
JMS Offer €4.40
5,0
4.500.000
GASS Initial Offer €4.30
4,8
4.000.000
4,6
3.500.000
4,4
3.000.000
4,2
2.500.000
4,0
2.000.000
3,8
1.500.000
3,6
1.000.000
3,4
500.000
3,2
3,0
11-Feb-14
0
11-Mar-14
11-Apr-14
11-May-14
Volume
11-Jun-14
11-Jul-14
11-Aug-14
11-Sep-14
Closing price
Source: Bloomberg
24
Listed peer companies and transactions
The analysis of ESS’ multiples implicit in the Competing Offer price as compared to
international peer companies shows that the Competing Offer is in line as compared to
market multiples, in terms of EBITDA and shows a slight premium in terms of results.
Multiples from listed peers (information dated 22 September 2014)
Market Cap
Company
EV/EBITDA
2015E
P/E
Country
(€k)
2014E
2016E
2014E
2015E
2016E
Spire
UK
1,444
10.2x
9.3x
8.3x
n/a
n/a
n/a
Orpea
France
2,808
13.2x
11.5x
10.4x
21.0x
18.4x
16.2x
Korian-Medica
France
2,354
11.3x
9.6x
8.5x
22.7x
17.1x
15.0x
Germany
20,820
8.4x
7.4x
6.5x
18.4x
16.0x
14.0x
Germany
3,276
9.7x
7.8x
n.a.
45.0x
26.9x
22.6x
Europe
Fresenius
Rhoen Klinikum
Median Europe
10.2x
9.3x
8.4x
21.9x
17.7x
15.6x
Average Europe
10.6x
9.1x
8.4x
26.8x
19.6x
17.0x
22.7x
Other Geographies
Australia
7,024
16.1x
13.3x
11.1x
30.8x
25.9x
South Africa
3,397
12.3x
10.5x
9.2x
20.3x
17.3x
14.7x
Mediclinic
South Africa
5,746
16.7x
14.2x
12.7x
26.4x
21.6x
19.1x
Life Healthcare
South Africa
3,415
13.7x
12.1x
10.6x
22.9x
22.0x
19.1x
HCA holdings
USA
24,731
8.5x
7.8x
7.0x
17.5x
15.5x
13.6x
LifePoint
USA
2,595
8.8x
7.7x
7.0x
23.9x
20.7x
18.2x
Universal Health Services
USA
8,795
9.8x
8.9x
8.0x
19.8x
18.0x
16.1x
Community Health Systems
USA
5,168
8.0x
7.0x
6.4x
21.6x
16.6x
14.2x
USA
4,822
8.7x
7.5x
6.9x
52.4x
25.7x
19.8x
Median Other Geografies
9.8x
8.9x
8.0x
22.9x
20.7x
18.2x
Average Other Geografies
11.4x
9.9x
8.8x
26.2x
20.4x
17.5x
Global Median
10.0x
9.1x
8.3x
22.7x
18.4x
16.2x
Global Average
11.1x
9.6x
8.7x
26.4x
20.1x
17.3x
9.8x
9.0x
8.3x
23.7x
20.3x
17.6x
Ramsay Healthcare
Netcare
Tenet Healthcare
ESS (Offer)
420
n/a – not applicable
Source: Bloomberg, 22nd September 2014
25
In fact, considering the takeovers launched since 2011 in Europe, the premiums offered
are high – 32% on average, as compared to the share price on the day prior to the offer –
as illustrated below.
Takeover bids in Europe – Premiums offered in relation to pre-announcement day closing
price
38%
37%
2011
28%
30%
2012
2013
32%
Average
2014
Source: Mergermarket. The above graph is based on information regarding takeover bids launched over European target
companies in various business sectors (with the exclusion of no sector). With the referenced criteria, a total of 350
observations were obtained, distributed as follows: 87 in 2011, 134 in 2012, 99 in 2013 and 30 in 2014 (until 22nd
September).
In light of this criterion and in comparison with the premium value range considered for
the Competing Offer (12% to 26%), the opinion of ESS’ Board of Directors is that the
JMS’ Offer does not reflect the whole of a potential control premium or the creation of
value through potential synergies.
The next table compares the EV/Revenues and EV/EBITDA multiples implicit in the
Competing Offer with the median of the multiples present in comparable transactions in
the sector since 2012:
Multiples from comparable transactions
Date
Target
Country
Buyer
EV /
Revenues
EV /
EBITDA
25-06-2014
03-06-2014
12-05-2014
16-04-2014
28-01-2014
04-10-2013
13-09-2013
10-09-2013
28-05-2013
21-02-2013
27-08-2012
26-04-2012
22-03-2012
20-03-2012
Clinique La Colline SA2
Partnerships in Care2
GdS1,2
Scanmed Multimedis1,2
Cura Day Hospitals Group Pty Ltd2
Teknon2
Rhoen Klinikum1,3
Terveystalo Healthcare Oyj2
EMC IM1,2
UK Specialist Hospitals Limited2
Emirates Healthcare (Part. 49,63%)
Rhoen Klinikum1,2
Grupo Hospitalario Quiron (Part. 40%)
Carint Scanmed (Part. 50%)
Sweden
UK
France
Poland
Australia
Spain
Germany
Finland
Poland
UK
UAE
Germany
Germany
Poland
Klinik Hirslanden AG
Acadia
Ramsay
Dadley Investments
Intermediate Capital Group
Doughty Hanson
Fresenius
EQT Partners AB
Penta Investments Limited
Care UK Limited
Mediclinic
Fresenius
United Surgical Partners Europe
American Heart of Poland
n/a
2.3 x
0.9 x
2.3 x
4.3 x
n.d.
1.5 x
1.4 x
1.2 x
0.4 x
2.0 x
1.5 x
1.4 x
2.6 x
8.8 x
8.8 x
7.1 x
13.2 x
16.2 x
13.0 x
12.3 x
12.4 x
16.5 x
5.8 x
10.6 x
10.9 x
9.5 x
8.5 x
26
09-02-2012 USP Hospitales2
Spain
Doughty Hanson
1.0 x
10.4 x
Median
Average
ESS (Offer)
1.5 x
1.8 x
1.5 x
10.6 x
10.9 x
9.8 x
(1) Listed target company
(2) Acquisition (or intention of acquisition) of a controlling position in the target company
(3) Sale of 40 hospitals (and related companies and holdings)
Source: Mergermarket; Research reports
n/a – not applicable
The analysis of these indicators shows that the Competing Offer values ESS slightly
below the market, based on the comparable transactions selected above.
Evolution of Equity Research analysts’ outlooks
The majority of Equity Research analysts have issued buy or outperform
recommendations on ESS’ shares, there being no sell recommendation at the date of the
Preliminary Announcement of GASS’ Initial Offer.
The average of the analysts’ price targets with Equity Research backing in relation to
ESS’ shares on the date of disclosure of the Preliminary Announcement of GASS’ Initial
Offer is of €4.26 (four Euros and twenty six cents). Currently, this average is € 4.46, thus
the Consideration offered by JMS corresponds to an average discount of 1%.
Therefore, the Board of Directors is of the opinion that the consideration offered by the
Offeror does not include the whole of a premium for possible benefits that may arise for
ESS from the acquisition of control by JMS.
Analysts’ recommendations and Price Target for ESS
Broker
Premium/
Price Target
(discount)
pre-Initial
Recommendation
compared with
Offer
Price Target pre(€)
Initial Offer
Current
Price
1
Target
(€)
Premium/
(discount)
compared
with Current
1
Price Target
Buy
4.55
-3.3%
4.55
-3.3%
Buy
4.20
4.8%
4.20
4.8%
Hold
3.90
12.8%
3.90
12.8%
27
Neutral
4.15
6.0%
4.50
-2.2%
Outperform
4.60
-4.3%
4.60
-4.3%
Buy
4.45
-1.1%
4.50
-2.2%
Neutral
3.95
11.4%
4.95
-11.1%
4.26
3.7%
4.46
-0.8%
Average
Source: Bloomberg, Research reports
(1) Information as of 22nd September 2014
Opinion of some Equity Research
Announcement of GASS Initial Offer:
analysts
stated following
the
Preliminary
BPI (20 August 2014): “The end or the beginning?...: the offer price, €4.30/share, stands
roughly in line with our YE14 FV for the stock (€4.26). Please recall that our €3.95 YE14
PT included a 10% small cap discount, which we believe is not justifiable in this situation.
Moreover, it could be argued that the acquisition of a controlling position in the company
could even deserve a premium”.
Santander (20 August 2014): “We note the price offered is slightly below (c5.5%) our TP
of €4.55 and 9.5% below the €4.70/share level that we have seen as a reference, based
on transaction multiples for M&A deals (involving good assets), which could be around
10x EV/EBITDA 2014E, so upside is now more limited”.
Credit Suisse (28 August 2014): “On 19 August, Mexican private health group Angeles
Health made a public offer for ESS at €4.30/share in cash. This represents a 16%
premium to an undisturbed price of €3.70/share (3 month average May-July, i.e. before
the news around the Espirito Santo group restructuring hit the Portuguese market). …We
believe that the 16% premium offered to the undisturbed average price is relatively low.
However, the specific circumstances surrounding the family holding company finances
may impact the bid premium. The average EV/EBITDA multiple for acquisitions in the
hospital sector in the last 3 years has been 10x. On this basis, it suggests an ESS takeout price of €4.6/share (on CS 2014E EBITDA)”.
Opinion of some Equity Research analysts following the Preliminary Announcement of
the launch by José de Mello Saúde of the Competing Offer (in 11 September 2014) and
the registry of GASS Initial Offer (in 19 September 2014):
28
Credit Suisse (11 August 2014): “Our ESS take-out price assumption remains
€4.6/share (10x CS 2014E EBITDA) and our unchanged stand-alone valuation of
€4.0/share represents a good benchmark for the potential downside if the bid fails.”.
BPI (22 set. 2014): “GASS’ price revision places the bid price closer to our YE14 FV of
Eur 4.55 but, in our opinion, it still does not reflect a potential control premium…”.
Potential creation of value accruing from the Resulting Business of ESS and
JMS
Although the documents of the Competing Offer highlight the benefits accruing from the
Resulting Business of ESS and JMS as one of its goals, they fail to provide quantified
information as to the potential synergies which the Resulting Business may create. The
relevance of these benefits cannot be disregarded, considering that these are the two
largest private health corporate group providers operating in Portugal and, as referred to
in the documents of the Competing Offer, the Offeror expects to obtain benefits at
different levels, namely, “improvements of the efficiency standards, at the productivity’s
perspective and at the costs’ reduction level”, by means of, for instance, “a higher
negotiating balance before the suppliers”; “better management of corporate centres”;
“sharing and global implementation of the best clinical and management of client’s
service practices”; increase of the “capacity to invest in high end technologies and
equipments”; “increase of the clinic quality standards and safety of healthcare services
provided”.
Therefore, the Board of Directors considers that the offered consideration does not reflect
the sharing of any potential synergies accruing from the success of the Competing Offer.
Thus, it follows that the Board of Directors considers that the current shareholders would
not be compensated for the potential benefit they would be providing JMS in case they
were to accept the Competing Offer.
Conclusion
The Board of Directors, following an analysis of the consideration of the Competing Offer
under the various valuation criteria described above, namely the price of the IPO, share
performance since the IPO, multiples of listed peer companies and comparable
transactions, evolution of analyst outlooks from Equity Research, potential synergies
accruing from the joint management of ESS and JMS, and the comparison with the
consideration offered by GASS, is of the opinion that although the offered Consideration
fits within the market valuation criteria, it may not fully reflect potential control premium,
nor the benefit of the potential synergies accruing from the success of the Competing
29
Offer. The consideration offered by JMS is 2.2% lower than the value of the GASS Initial
Offer and for that reason it will have to be revised if JMS intends to successfully register
its Competing Offer.
Comparison between the Offer and several indicative prices, in value
3,72 €
3,49 €
3,20 €
3,59 €
3,94 €
4,46 €
4,56 €
4,50 €
4,94 €
Offer price
€4.40
3,67 €
IPO Price VWAP since 6 month
3 month
3 month
Closing
IPO
VWAP pre undisturbed VWAP pre
Price pre
GASS Offer
VWAP
GASS Offer GASS Offer
Average
Analysts'
Price
Targets
Implicit price GASS Offer Implicit price
price
(market
transaction
multiples)*
multiples)*
Source: Bloomberg
(1) Information as of 22nd September 2014
Comparison of the Consideration offered and several indicative prices, in percentage
38%
26%
23%
20%
18%
12%
-1%
-3%
-2%
-11%
IPO Price VWAP since 6 month
3 month
3 month Closing Price Average
IPO
VWAP pre undisturbed VWAP pre pre GASS
Analysts'
GASS Offer
VWAP
GASS Offer
Offer
Price
Targets
Implicit price GASS Offer Implicit price
(market
price
transaction
multiples)*
multiples)*
Source: Bloomberg
* Assuming the median of the EV/EBITDA multiples applied to the analysts’ consensus values for the ESS 2014E EBITDA
and net debt (Bloomberg, 22nd September 2014)
(1) Information as of 22nd September 2014
30
6. INTENTIONS OF THE MEMBERS OF THE BOARD OF
DIRECTORS THAT ARE ALSO ESS’ SHAREHOLDERS ON THE
ACCEPTANCE OF THE COMPETING OFFER
The following table shows the shareholdings in ESS’ share capital held by each member
of the Board of Directors and their respective intention to accept or decline the Competing
Offer. As stated above, the Consideration offered by the Offeror does not enable the
Competing Offer to subsist, as the GASS Initial Offer was registered with a consideration
in the amount of € 4.50 (four Euros and fifty cents) per share. Nevertheless and unless
there is a change in circumstances, or in the conditions of the Initial or the Competing
Offers or other constraints unrelated with the Competing Offer, none of the members of
the Board of Directors who hold shareholdings in ESS’ share capital intend to sell their
shares to the Offeror for the € 4.40 (four Euros and forty cents) consideration offered per
share.
Members of the Board of Directors
Shares held
Intention
-
-
Isabel Maria Pereira Aníbal Vaz
21,224
Non-acceptance
João Paulo da Cunha Leite de Abreu Novais
19,797
Tomás Leitão Branquinho da Fonseca
60,267
Ivo Joaquim Antão
11,297
Pedro Gonçalo da Costa Pinheiro Líbano Monteiro
19,620
António Davide de Lima Cardoso
6,050
Artur Aires Rodrigues de Morais Vaz
4,738
José Manuel Malheiro Holtreman Roquette
3,090
Maria do Rosário Nunes Vicente Rebordão Sobral
10,000
Diogo José Fernandes Homem de Lucena
Luís Espírito Santo Silva Ricciardi
600
Non-acceptance
Non-acceptance
Non-acceptance
Non-acceptance
Non-acceptance
Non-acceptance
Non-acceptance
Non-acceptance
Non-acceptance
-
-
15,000
Non-acceptance
Alexandre Carlos de Melo Vieira Costa Relvas
-
-
Nuno de Carvalho Fernandes Thomaz
-
-
1,000
Non-acceptance
João Carlos Pellon Parreira Rodrigues Pena
José Manuel Caeiro Pulido
Pedro Guilherme Beauvillain de Brito e Cunha
31
7. OTHER INFORMATION
As at the present date, the Board of Directors has not received from the employees,
either directly or through their representatives, any opinion on the labour repercussions of
the Competing Offer.
No member of ESS’ Board of Directors is a member of any corporate body of the Offeror
or of companies in a dominant or group relationship with the Offeror, nor has any relevant
tie or specific interest in the Offeror or in the companies in a dominant or group
relationship with the Offeror and therefore no member of the Board of Directors is in any
way hampered from making an unbiased analysis of the Competing Offer.
8. APPROVAL OF THE REPORT BY THE BOARD OF DIRECTORS
The present Report was favourably approved in the Board of Directors meeting held on
24 September 2014 for the purpose of assessing this Report. All directors present voted
favourably, with the exception of the Director Mr. João Carlos Pellon Parreira Rodrigues
Pena who abstained for the reasons set out in a statement presented by the latter and
attached hereto (see Schedule 2).
32
9. SCHEDULE 1
Aggregated Net Debt to EBITDA ratio analysis
€M
June 2014
Annualized EBITDA
122
1
61
JM Saúde Annualized EBITDA 2
61
ES Saúde Annualized EBITDA
Net Debt (assuming 2/3 of debt to finance the acquisition)
534
Net Debt to EBITDA 2014E
4.4x
ES Saúde Net Debt
184
JM Saúde Net Debt
70
Acquisition Debt 2/3
280
Net Debt (assuming 100% of debt to finance the acquisition)
674
Net Debt to EBITDA 2014E
5.5x
ES Saúde Net Debt
184
JM Saúde Net Debt
70
Acquisition Debt 100%
420
1: Projection of 2014 EBITDA according to research reports consensus
2: Projection of 2014 EBITDA based on 1H 2014 and proportion of 1H 2013 vs. 2013
Source: Bloomberg and companies websites, 22 September 2014
Net Debt to EBITDA ratios from listed peer companies
Net Debt to EBITDA
Company
Country
2014E
Spire
UK
3.0x
Orpea
France
5.3x
Korian-Medica
France
4.2x
Fresenius
Germany
3.3x
Rhoen Klinikum
Germany
-3.2x 1
Europe
Europe Median
3.3x
Europe Average
2.5x
Other Geographies
Ramsay Healthcare
Australia
1.7x
Netcare
South Africa
0.9x
Mediclinic
South Africa
3.7x
33
Life Healthcare
South Africa
0.7x
HCA holdings
USA
3.8x
LifePoint
USA
3.3x
Universal Health Services
USA
2.0x
Community Health Systems
USA
5.7x
Tenet Healthcare
USA
5.4x
Other Geographies Median
3.3x
Other Geographies Average
3.0x
Global Median
3.3x
Global Average
2.8x
1: The ratio is negative because the company has more cash than debt
Source: Bloomberg, 22 September 2014
34
10.
SCHEDULE 2
Espírito Santo Saúde
To the attention of the Board of Directors
Ed. Amoreiras Square,
Rua Carlos Alberto da Mota Pinto, no. 17 – 9th floor
1070-313 Lisbon
Lisbon, 24 September 2014
Dear Sirs,
As this Board is aware, the company Rioforte Investments (RFI) requested on 22 July last, before
the Court of Luxembourg where it has its registered office, to be brought under the ‘gestion
controlee’ regime.
Although the shareholder of Espírito Santo Saúde (ESS) is Espírito Santo Healthcare Investments
(ESHCI) and the signatory hereof is a non-executive Director of ESS, the fact he is also a Director
of ESHCI and especially CEO of RFI cannot be discredited, on a personal level.
In that capacity, I considered it my duty to promptly report to the Court, through RFI’s lawyers in
Luxembourg (EHP), the Preliminary Announcement of the Takeover Bid over the whole of ESS’
share capital by José de Mello S.A. on 11 September last, as well as the resulting presentation of
the Offer Documents for registration with the CMVM, regarding which this BoD must issue an
opinion under the terms and periods provided for by law.
Although RFI is not an ESS shareholder, the possible decision by the Court should be taken into
account by the Board of Directors of RFI, especially by its CEO.
Given that such decision has not yet been communicated to RFI, it is my belief that, as CEO of a
company under ‘gestion controlee’, I should not state an opinion as non-executive Director of ESS,
whether favourable or unfavourable, regarding the content and recommendations stated in the
Report of ESS’ Board of Directors, the target company of said Takeover Bid, issued for the
purposes and under the terms set out in the PSC.
For this reason I abstain in the belief that my abstention will not hinder the decision now taken by
the Board of Directors.
I request this letter to be attached to the Minutes of the Meeting of ESS’ Board of Directors of this
same date.
With my kindest regards,
[illegible signature]
João Rodrigues Pena
Member of the Board of Directors, Espírito Santo Saúde
Chief Executive Officer, Rioforte Investments, SA
35
Contacts
Market Relations Representative
of ESS
João Novais
Investor Relations of ESS
Jorge Santos
Email: [email protected]
Telephone: + 351 213 138 260
Fax: + 351 213 530 292
36

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