Primary Health Properties (PHP) has announced an all-share merger with fellow healthcare property group MedicX.
Medicx investors will receive 0.77 new PHP shares for every MedicX share, equivalent to 88.7p. The deal represents a 14.3% premium to the closing price of MedicX shares the day before the deal. Following the deal, PHP shareholders will own 69.4% of the combined business and MedicX shareholders will own 30.6%.
PHP shares fell 1.5% in early trading.
We think Primary Health Properties (PHP), which owns and rents out primary care buildings like GP surgeries in the UK and Ireland, could be an attractive option for income-seeking investors.
GPs in England get over 300m visits a year. And with just two visits to A&E costing more than a whole year's worth of GP care, investing in community services is both vital, and cost-effective.
In England, the government's aiming to have 5,000 more GPs by 2020. Other community services, like mental health and community nursing, are also being tied more closely to surgeries. This means the facilities needed to keep everything running are getting more complex.
PHP's purpose-built properties are in demand, and asset values have been climbing steadily. The expansion into Ireland provides more room for growth too.
All but one of its 313 buildings are occupied, while an average lease that has 12.9 years to run until first break means future rental income is very visible. More importantly, 90% of its rental income comes either directly or indirectly from the NHS or its Irish equivalent. Governments make for very reliable tenants.
As a Real Estate Investment Trust, or REIT, PHP has to return 90% of its rental profits to investors as dividends, making for a potentially attractive income. The result is a prospective yield of 4.7% next year.
The proposed merger with MedicX, helps the group add scale, and that means cost savings and cheaper financing options. The price of the deal mean's it's more immediately favourable to MedicX shareholders than PHP investors, but in the long run we think it makes sense for all involved.
We'd expect PHP to make more acquisitions going forwards - but a comparatively high loan-to-value ratio following the merger means it will probably need shareholders to fund that growth. Rights issues are likely to be a feature of the company going forwards.
Like PHP, MedicX is a specialist primary care infrastructure investor in the UK and Ireland. As of the end of September last year it had a portfolio of 166 properties, worth approximately £806.7m. Last financial year the group generated earning per share of 3.9, and reported a Net Asset Value (NAV) of £362.2m or 81.8p per share.
The board believes that the two property portfolios are highly complementary, and will allow PHP to better meet increasing demand for high quality primary healthcare facilities in the UK and Ireland.
The merger is expected to create significant operational and investment management cost savings, with additional financing savings over the medium term. Total savings are expected to be around £4m per annum by the end of the first full year, equivalent to 0.4p per share - this includes a £3m fall in property management fees which can be delivered immediately. The combined group is expected to a have the lowest Cost Ratio in the UK-REIT sector.
The newly merged company will have a portfolio of 479 properties, with a combined value of £2.3bn. The group's loan-to-value ratio will rise to 48% after the merger, compared to 44.6% at PHP's recent half year results.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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