Proposed sale of Alliance Medical Group: Conference call transcript

Conference call transcript

6 October 2023

PROPOSED SALE OF ALLIANCE MEDICAL GROUP

Operator

Good morning, ladies and gentlemen, and welcome to Life Healthcare's proposed sale of Alliance Medical Group investor presentation. All participants will be in listen only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing * then 0. Please note that this call is being recorded. I would now like to turn the conference over to Peter Wharton-Hood. Please go ahead, sir.

Peter Wharton-Hood [Group Chief Executive of Life Healthcare]

Thank you very much and good morning, ladies and gentlemen. Welcome to Life Healthcare's investor presentation where we will discuss with you the proposed sale of Alliance Medical Group, which we refer to as AMG. The agenda for today is I'll take you through the proposed transaction summary and the strategic rationale that backs it up. Pieter van der Westhuizen will then talk to you about how we intend using the proceeds that come from the sale and some of the conditions precedent and warranties that need to be satisfied for this deal to conclude. And then I'll wrap up with some prospective conversations around what we think Life 2.0 will look like post the conclusion of the transaction and some of the transaction timelines.

If we have a look at the overall of the transaction timelines, if we have a look at the overall transaction itself, this is the conclusion of a particularly rigorous board process. We've spoken at length to the market about the unsolicited proposals that we received to acquire Alliance Medical Group. It was never our intention to sell the asset. We didn't put it up for sale, and we didn't cast any doubt around our ownership of Alliance Medical Group and its prospects.

However, as we explained from a fiduciary and executive perspective, if you receive offers for assets, you have to take those offers seriously, if they are serious, and you have to evaluate them. I had said on previous occasions that all assets are for sale at the right price, and this rigorous process was not just about price. We had many other things to evaluate and hence the amount of time it has taken us. We have concluded an SPA and transaction agreements with a signature date of 5 October. And we're delighted to be doing business with Icon Infrastructure.

The perimeter of this transaction is a sale of 100% of the issued share capital of AMG. But it's important for us to note that we demarcated AMG by excluding Life Molecular Imaging. We refer to that as LMI. And it's important because when we talk about the prospects for this company, LMI has an important role to play. The proposed purchase price places an enterprise value on AMG of £910 million, at yesterday's exchange rate a shade over R21.3 billion. That derives to an equity value of just shy of £600 million, more specifically £593 million, with a Rand equivalent of just short of R14 billion after Alliance Medical Group's debt.

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The intended net use of proceeds is a key part of our discussion, the detail of which will follow, but we think there will be net proceeds amounting to £462 million after we repaid our international debt component and the transaction costs, which leaves us with approximately R2.4 billion for our growth initiatives and about R8.4 billion for distribution to shareholders. And one will appreciate at this particular juncture, those amounts are approximate.

We have conditions precedent to the closing of this transaction. It is a category one transaction which requires greater than 50% support on an ordinary resolution of the shareholders of the company to be held in due course. And there are other regulatory and other approvals across various jurisdictions, which are typical for a transaction of this nature. The Life Healthcare shareholder meeting is envisaged for early December of 2023, and we expect the regulatory approvals to complete during the first quarter of 2024.

From a strategic perspective, it's important for us to be able to explain how we got ourselves to this enviable outcome. We have realised a significant premium when referenced to the implied value of Alliance Medical Group based on the sum of the parts earlier in the year. We've had extensive discussions with investors along the way, and we realised that a significant portion of the value that Alliance Medical Group holds was in the outer years of delivery. And there was some pressure from certain investor groups for shorter dated returns as opposed to longer dated holding periods.

The proposed equity value represents about 47.8% of our market capitalisation pre the February cautionary announcement. And the intended return of approximately R8.4 billion to shareholders will come via a special dividend and or share buybacks as appropriate. It's important for us to recognise and continue to recognise that AMG is a valuable asset. And this sale merely de-risks the delivery of AMG's business plan, giving a larger portion to the current date in the way of cash as opposed to realising that value in the outer years over an extended period of time.

As I mentioned earlier, 100% of LMI remains with Life Healthcare. The proposed transaction will result in a material reduction in the group's gearing. Consequently, we see improved returns and improved cash conversion metrics for both the group and the remaining businesses. We will be flexible from a balance sheet perspective, our level of resilience increases, and we will have an improved cash generation ability. Post- implementation, Life Healthcare will be positioned as a leading diversified integrated healthcare services provider in Southern Africa with the optionality to extract value internationally from our LMI operations.

We believe that this transaction gives us expanded headroom to accelerate our already identified growth initiatives, including our integrated care strategy in Southern Africa and the optionality to which we refer in Life Molecular Imaging. I'll now hand over to Pieter who will take us through the use of proceeds, conditions, precedent and underlying warranties.

Pieter van der Westhuizen [Group Chief Financial Office of Life Healthcare]

Thank you Pete. Good morning everyone. As Pete stated, the enterprise value on a post-IFRS 16 basis of £910 million at yesterday's exchange rate of R21.3 billion. We will first settle all international debt, pay back the

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transaction or paying transaction related expenses of £31 million. There are some accelerated incentives arrangements for the AMG staff that we will also settle as part of the proceeds. Equity value in total of £593 million or R13.8 billion. And then the intention is to bring back the net proceeds to South Africa in terms of our Reserve Bank approval process. That quantum is £360 million that we intend to distribute to shareholders, plus the £102 million that we intend to retain for future growth opportunities. That will come back to South Africa. And we will then evaluate during the first quarter of next year, and post that we will evaluate how much will be distributed back to shareholders, but the intention is £360 million pounds.

In terms of conditions precedence, mainly regulatory in nature, as Pete stated. Because the transaction is a category one transaction, we require 50% of Life Healthcare shareholders to approve a transaction. In addition to that, Alliance Medical Group is a guarantor for all our debt packages, and we need to release Alliance Medical Group from this debt package. And to that extent, we need a noteholder a resolution for our bond programme, as well as the loan and banking agreements need to release AMG as a guarantor for the existing debt arrangements.

From a regulatory approval perspective for the purchaser, there is merger control clearance required in Ireland and foreign investment clearance required in Austria, Germany, and Italy. This is a fully insured transaction, so there's a comprehensive warranty and indemnity insurance policy in place. Life Healthcare Group Holdings will remain as a guarantor under the SPA related to fundamental warranties. It's specifically for the title of holding of the business as well as capacity for the business in terms of solvency. No concern on that part. And then there's limited set of indemnities that are also being provided relating to tax governance. I'll hand you now back to Pete in terms of Life 2.0.

Peter Wharton-Hood

Questions have been asked what this means for our business. The first point to make is this has absolutely no impact on our Southern African operations, which continue along the lines that they've been run previously. However, there are different growth differentiators that we will now refer to that require some discussion as we now have the capacity to accelerate what we previously identified as differentiators. Those investors that are familiar with the company have seen this slide before, so I don't need to explain what we think our enablers and capabilities or business lines are.

But in focusing on our differentiators, given the recently concluded network relationships or funder deals that we've done, we are now the leading network provider and funder partner of choice in South Africa. You have read about our ambition statements in renal and the launch of our integrated care product in renal has the capability to scale across this expanded network via our FMC acquisition [51 of Fresenius Medical Care's southern African dialysis centres], which is still subject to competition regulatory authority approvals.

We also have developed the capability within Life Healthcare in South Africa to develop other integrated care products, which are well on track. We have an oncology strategy which we now have the firepower to be able to roll out across the country, starting principally with the specialised institute at Life Vincent Pallotti Hospital and other regions to take care of that thereafter. We have progressed our diagnostic and imaging ambitions, both through the acquisition of the non-clinical assets of ECR [East Coast Radiology] and EMR [Eugene Marais

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Radiology], and the favourable ruling that the HPCSA ruled in our favour more recently, allowing us to expand that with some vigour.

You'll have also heard about our acquisition of a nuclear medicine business named TheraMed, which becomes one of the cornerstones of our nuclear medicine ambitions in South Africa, and the opportunity for us to be able to expand an early diagnostic and imaging network therefrom.

In terms of radiopharmacy, we broadcast our joint venture with ALSIA and the building of the two cyclotrons in Midrand, which are now well progressed. In that regard, it's important for us to also explain that whilst we are disposing of 100% of our interest in Alliance Medical Group, we have concluded ongoing support agreements between AMG and Life Healthcare, both in the support of our molecular imaging strategy domestically and in the manufacturing distribution in NeuraCeq in Western Europe. So, this is not just a disposal of an asset, it's the formation of an ongoing relationship, which we are proud to do in conjunction with Icon Infrastructure, as we believe that together, we have the expertise and capability to be able to grow and develop that component of our business professionally and with expertise and at some pace.

In all, what this is telling us is that Life 2.0 doesn't require dramatic change in what the business does, but it will bring an incremental focus on our South African ambitions and the opportunity to be able to concentrate not only on the efficiency of our acute hospital operations, but the growth and development of the ancillary pillars outside of our acute hospitals, which we believe we have both the expertise and now the financial capabilities to accelerate and do it well.

In the context of Life Molecular Imaging, this has been an ongoing discussion over the last 18 months. We've been blessed with favourable news flow in relation to regulatory approvals in this particular care pathway, and I reiterate that Life Healthcare sees a significant growth potential in revenue through Life Molecular Imaging's radiopharmaceutical portfolio internationally. We have all acknowledged that Alzheimer's is a global healthcare challenge. We've also acknowledged and accept within Life Healthcare that it's essential for us not only to invest but to prepare well for LMI's role in this care pathway.

The positive news flow that I referred to is around the recent drug approvals in the U.S. Additional drug approvals are on the way in Europe, Japan and China, which indeed will bolster the demand for the diagnostic. We will invest over the next 12 to 18 months to ensure that we have the capabilities to benefit from this opportunity. And we've got a pipeline of investments on a stage-gated basis to make sure that we are correctly positioned in the medium term. I refer to the timelines below, which you can read at your leisure later on. But all in all, we have a fundamental belief in both the positioning of LMI, the value that NeuraCeq will bring to the Alzheimer's care pathway, and the global demand that will be put in place for our diagnostic treatment.

With that, it is with a sense of optimism that we report on a favourable transaction, a transaction that we believe is in the interest of shareholders. We believe that we have chosen in Icon Infrastructure a particularly professional partner that will not only honour the partnership obligations that are written into our transaction agreement, but they will also be an employer of choice for the employees in Alliance Medical Group that we hold dear to our heart. Alliance Medical has contributed significantly to the value uplift in Life Healthcare over

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the past six years. We're proud of the asset and the knowledge contribution that they've given us in diagnostics, imaging, radiopharmacy and PET-CT will prove to be invaluable in the creation of value in Life Healthcare in the near future.

The salient dates to which we refer to are now the detailed terms announcements which we signed yesterday. The distribution of the circular will be in early November. The general meeting of shareholders will be in early December. Regulatory approvals approximately 12 weeks thereafter and the finalisation and closing in the first quarter of 2024. With that we will now take questions.

Operator

Thank you sir. Ladies and gentlemen if you would like to ask a question please press * and then 1 now. If you decide to withdraw your question, please press * and then 2. Again, if you would like to ask a question, please press * and then 1 now. The first question we have comes from Roy Campbell from RMB Morgan Stanley. Please go ahead.

Roy Campbell

Good morning. Thank you and congratulations. Firstly, just the timing of the allocation of capital to the growth initiatives. What have you assumed over there and in your guidance for the South African balance sheet to be 1x geared, is it assumed that that capital has been allocated or is it on balance sheet?

Pieter van der Westhuizen

Morning, Roy. In terms of the timing of that, we estimate that the growth initiatives if close happens in the first quarter, will be paid in the second quarter. The two items are imminent. And in terms of the de-gearing, it is excluding the retention of the £100 million. It's excluding from that number. So, it's purely just based on the South African balance sheet as it stands now.

Roy Campbell

Okay, thank you. I'll leave it there. I have got one more question, but I'll just pass it on.

Operator

Thank you, sir. The next question we have comes from Alex Comer from JP Morgan. Please go ahead.

Alex Comer

Hello. So, a couple of quick questions. One, can you just tell me, before you pay the £360 million, where do you think your net debt and leases land? So, obviously you've closed the year, so when the money's coming in and you've paid everything out, what is your net debt position overall and what is your lease liability overall in Rand?

Pieter van der Westhuizen

It's roughly about R4.5 billion, Alex.

Alex Comer

What, together?

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