Life Healthcare (LHC) – The 6-year divestment itch

On Friday, 14 October 2022, a report surfaced that Life Healthcare is considering offloading all or parts of Alliance Medical (AMG). The divestment rumour appeared six years after LHC acquired AMG. LHC divested two other international businesses (Max Healthcare and Scanmed) within six years of their acquisition.

We reported that LHC’s profitability in 1H22 weakened due, in part, to the ending of Covid-related contracts AMG had with the National Health Service in England. AMG generates its most revenue from the UK – the division has the highest number of sites and scanners (46% of AMG’s MRI/CT scanners and 74% of PET-CT scanners during FY21), but its diagnostic imaging volumes have remained stable since its acquisition. Challenges with achieving economies of scale in the UK are likely the reason behind the group’s divestment consideration, in our view.

We used a sum-of-the-parts to value AMG based on a 12-month forward P/E of 30.0x. We looked to companies involved in diagnostics (pathology and testing kits) in the UK and Europe to baseline a forward P/E for AMG, because of the scarcity of listed pure radiology imaging businesses. We value AMG at R8.8bn. In FY21, LHC’s intangible assets amounted to R16.4bn and we estimate that AMG accounted for c.70%. There is likely to be an intangible assets impairment, in our view.