Healthscope deal was a non-starter

The role that investment banking advisors played in Healthscope's botched efforts to acquire aged-care operator Arcare is one of the untold chapters in this sorry tale.

Weeks before institutional shareholders had the opportunity to revolt against the $200 million-plus transaction after getting wind of Healthscope's plans by way of a press leak last Wednesday, the company was out talking to stockbrokers about deal funding.

A source close to the transaction suggests that Healthscope sought advice from Goldman Sachs JBWere and Merrill Lynch regarding an equity raising. The company was (quite reasonably) focused on minimising risk by partnering with a bank confident enough to underwrite the deal, and prepared to maintain confidentiality and commit to the underwriting without first sounding out institutional investors.

The raising was never going to be an easy sell. Equity markets are unfamiliar with the aged care sector, and the low near-term profitability of Arcare meant the transaction would dilute Healthscope earnings per share by around 15 per cent in the near term.

Goldman Sachs saw the risks, and was equivocal about its ability to get the deal away. There were no such reservations from Merrill Lynch, at least not initially. With recent Goldman-expatriate Craig Drummond at the helm, Merrill expressed preparedness to meet Healthscope's preferred terms, which would see it underwrite the deal without first taking soundings. Proposed pricing was a discount of around 15 per cent to Healthscope's trading price.

With involvement from Merrill set to underpin the proposed raising, possibly alongside another firm, Healthscope continued to work towards announcement of the acquisition. That was until plans were derailed by Wednesday's leak, prompting Healthscope to go into a trading halt and accelerate discussions with shareholders.

There are at least two conspiracy theories doing the rounds regarding who would have leaked the proposed transaction, and why. However, there is little question that the leak and its aftermath saved potential underwriters of the Healthscope raising from an embarrassing and costly failure.

What also appears clear is that Merrill Lynch's initial view that the Arcare transaction was saleable to Healthscope's institutional investors was misjudged. In fact, four institutions led by Cooper Investors are understood to have petitioned Healthscope chair Linda Nicholls last week, setting out their negative views.

Nicholls acted responsibly, telling chief executive Bruce Dixon that if he could not gain the support of shareholders, the deal was off. She had no interest in pushing the deal through at any cost. With the institutions valuing Arcare at a discount as high as 50 per cent to the proposed deal price, this was an argument Dixon was never going to win.

NEVER TOO LATE

West Australian Newspapers yesterday announced a profit fall of around 8 per cent in the December half, although with the second quarter stronger than the first, analysts are hopeful the company will show positive revenue growth in the March quarter as the economic turnaround in WA gathers pace.

However, possibly more interesting than quarterly profit data were continuing signs that, more than a decade late, West Australian Newspapers is finally embracing the internet.

Just last year, in a move that smacked of Kerry Stokes's influence, the company upgraded its basic web presence to a more sophisticated offering powered by Yahoo!7.

A further step into the digital age was unveiled yesterday, when the half-year results briefing contained news that the company was making its first foray into internet classifieds. A deal has been struck with second-tier jobs board operator jobsjobsjobs to co-produce a new employment classifieds site focused on the West Australian market, with the new site launched last week.

Capturing the internet opportunity couldn't come a moment too soon as The West Australian looks to be suffering from the same print classifieds challenges as newspapers everywhere. In the December half, employment advertising revenue fell to less than $15 million, from $25 million in the previous corresponding period.

The new employment site looks to be off to a solid start with listings from most major recruiters. It's early days, but if the new player can successfully cross-promote the web and print offerings, it just might prove a worthy competitor for Seek in the WA market.

FRESH FACES

Board renewal at Fairfax Media, publisher of BusinessDay, is on the cards following the departure of three directors in the second half of last year.

Recent speculation has focused on at least two appointments, one director with digital media experience and one to chair the board's audit committee. Appointments are expected around the time of the Fairfax half year result, set down for February 22.

As the date draws near, one well-placed source suggests that the digital media-related role will be filled by Martin Dalgleish. He spent a number of years leading the Packer empire's charge into the digital age, but is currently focused on non-executive roles. Dalgleish's blue-chip CV includes a stint as executive director at Consolidated Media, with responsibility for investments in Foxtel, Premier Media Group (Fox Sports) and Seek. Other digital experience includes board roles at ninemsn, Carsales, Myhome and iselect.

dsymons@smh.com.au