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Tuesday, 12 January 2021

Healthcare mega-merger, dissected

What to expect from the health industry’s mega-merger: In a conference call with investors yesterday, Cleopatra Hospitals Group (CHG) CEO Ahmed Ezzeldin and Chairman Ahmed Badreldin broke down the healthcare provider’s planned acquisition of Alameda Healthcare Group’s Egypt assets. The merger, which was announced last month, is still pending regulatory approvals but is expected to close before the end of June. Key takeaways from the call:

The basics: The combined group is expected to hold around 15% of Greater Cairo’s commercial bed capacity, with CHG currently holding 8% and Alameda bringing 7% to the new entity. In terms of facilities, CHG has six facilities, while Alameda has three facilities up and running and a fourth that it expects to inaugurate in 1H2021.

The merger comes at a time when the private healthcare industry is ripe for investments — and consolidation. With a growing population and longer life expectancies, combined with an increased prevalence of chronic diseases, there’s “a huge market that’s growing every year,” said Ezzeldin. The vast majority of hospital beds — of which Egypt has 1.3 per 1,000 citizens — are owned by the health and defense ministries and university hospitals, while the private market that holds the rest of the country’s patient capacity is “totally fragmented.”

It also coincides with the ongoing roll-out of the government’s universal healthcare scheme, in which the combined company “expects to be a key partner,” said Badreldin. “With the combined scale, we expect to be able to expand our capacity in other governorates following the healthcare scheme,” he said.

What about the competition authority? The call ended without officials addressing a question from Enterprise about regulatory approval of the transaction. The Egyptian Competition Authority has expressed opposition to the merger.

Both CHG and Alameda are going into the merger on solid financial footing: CHG closed out 2020 with revenues north of EGP 2 bn, following record performance during the fourth quarter of the year, said Ezzeldin. The company is expected to release its full-year earnings in around six weeks or less, he noted. Alameda’s 9M2020 revenues come in at around EGP 1.49 bn, growing 4% y-o-y despite the pandemic.

…and they expect a bump from the merger: Overall, Cleopatra runs its facilities at 65-75% utilization, and Alameda has a utilization rate of around 50% across its hospitals, said Badreldin. CHG expects Alameda to “exhibit strong EBITDA and cashflow generation,” given the group has invested north of EGP 3.5 bn in capex over the last four years, said Badreldin. The merger is expected to accelerate the overall growth trajectory for CHG, which has been investing in the Egyptian market since 2015. Alameda’s hospitals already enjoy a strong reputation, but operate “at somewhat lower margins'' than CHG. “There is, in our view, room for EBITDA margin improvement for the Alameda assets to bring them to the same level” as CHG’s, whose flagship hospital runs at north of 30% EBITDA margins.

The merger will also improve service quality and employment prospects: Both CHG and Alameda are expected to benefit from clinical standardizations and the transfer of knowledge, allowing for enhanced patient safety and an improvement in the quality of outcomes, said Badreldin. The combination of the two healthcare players will also benefit the healthcare industry at large by creating at least 2,000 new jobs, Ezzeldin said.

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