Hello, and welcome to the Australians Money Puzzle podcast.
I'm James Kirkby. Welcome aboard everybody.
As a private investor in shares, you're probably already realized that you're at the back of the queue when things go wrong, and I think we almost expect to be dotted out of the best deals.
In some ways. It's often been like that.
It's infuriating as well to watch really good stocks being cherry picked, you know, by overseas takeover merchants as time goes by. But something on a whole other level has been happening on the share market this year. It's what I would call the plundering of the ASX by private equity groups and it's come to a head with this week.
There was a.
Stock folks called health Scope, which was an extraordinary story, a small company that literally became a five million dollar company and then it was taken over by private equity and this week it went into receivership. But thirty seven hospitals might I add attached to that. Joining me on the show today is Eric Johnson. He's Associate editor Business on The Australian. He's been on the show before and he's been following this from the very beginning.
Hawai, Eric, gooday, James, thanks for having me on.
Good to have you on.
We might briefly explain the importance of this story to all our listeners because it's the backdrop here is about the share market we know in which we expect to invest getting hollowed out right, and we mentioned a few things there. Takeovers is one and great company has been taken over. But could you explain to everyone just briefly about health Scope, what's happened, where are we at there?
So the name Healthscope is probably not that widely known, but people would know the local hospitals like a Knox private hospital. There's a Sydney clinic and people would know that. So it's a pretty important part of the health sector in terms of it's the second largest private hospital operator and it also operates the Northern Beaches Hospital that's relatively
new one up in Sydney as well. And it's a really important part because it's a lot of the well the elective surgery, so non critical stuff but still really important. So James, you'll get your hip operation done there or your knee operation done there and other things that non life you know, threatening but still pretty important for your lifestyle now that it was listed on the AX. Previously listed back in twenty nineteen, it was subject of a
pretty aggressive takeover battle. Initially, Australian Super was part of a consortium looking to buy it out. So Ossie Super wanted to buy it and park it just seeing the long term potential of this operator. However, they were edged out by a Canadian company and we've heard of this company before, called Brookfield, a huge asset manager in terms
of funds under management. Yes, so yes under management. Brookfield were the ones making the chase for Origin Energy about two or three years ago ago to and that was ultimately unsuccessful. Ironically, it was Ozzie Super that blocked that deal from going out here.
They blocked them. Yeah, so they often work in tandem. But so this company, like.
Health Scope, it was a big six billion dollar company. It owned hospitals and obviously these guys bolted because they thought they could make more money out of it. Listeners would know, like listed on the stock market still something like Ramsey Health, nothing like the company it was a few years ago, but still a big company, multi billion dollar company making you know, half a billion dollar profits.
Those profits are arising, it can be done. So you were onto this fairly early, and I remember reading, I don't know, maybe ten days ago you did a piece and you called the Brookfield people barbarians, and then you said there was two sort of scenarios that were possible, and then you know one was receivership, and you said that was the most likely, and I remember thinking.
That's a bit strong, But it's come to passer.
First of all, when you say barbarians, would you explain for people who aren't familiar, what is the's the game of these people in Brookfield?
What do they do?
Why do they buy the companies in the first place. If it's ended up in receivership, something's gone terribly wrong. What was their plan and what went wrong?
To be fair to the barbarians, they didn't plan for it to blow up to the extent it did. But remember these are meant to be the smartest people in the room, and they enjoy telling everybody that they are. They badly misread what was happening, but also they undermined their own business models. So they came in twenty nineteen, overpaid for it, borrowed heavily, so leveraged up the business
borrowed heavily. Initially, they broke their business, the operating business up from all the hospitals they're actually operated, So they sold off the physical hospitals, so the building. So what was left was a fairly asset like business with a lot of debt. So that sale or the hospital was partly used to fund the acquisition, so some of that distribution went well, that went back to shareholders that previously
owned it. However, as you know, it's always good to have a strong balance sheet for unexpected and in health care. Health care is a really complicated industry, and any happened what happened a couple of months later, COVID hit and all the private hospital sector shut down. Elective surgery effectively stopped that starved off the funding the revenue stream, so that was a crisis. Yet these hospitals still had to pay rent for their overheads and so on.
Because these guys had leveraged it up right before the sort of calamity of COVID, they had no balance sheet strength when things went wrong.
Well, look and just to sort of finish that thought as well, so they're also paying off debt, but then coming out of COVID was another crist It says, we all know for the health sectors, so staff shortages, wage inflation, and then also input costs, so spiraling costs for that. Sorry, you know, there were people falling out of the system, so you know, people paying more for wages. So there
was just huge pressure on their cost side. Yet the revenue about getting from like if surgeries just wasn't covering this new sort of real world.
So everything went wrong and it's now in receivership. And I suppose to the people on the street are people who use the hospitals. It's pretty scary. So there's thirty seven hospitals and anyone listening to the show will know one of them for sure. When I looked at the listener and I had been in two of them, and they're major hospitals in the cities. But the question it begs, I suppose, is to one extent, the wider market is vulnerable to this sort of thing. You mentioned how Brookfields
when they came in, they geared up. They leveraged up the balance sheet pretty fast. In some ways they used the asset they bought to finance the purchase that they did, and that rings a bell for me, that reminds me of the buccaneers of yesterday, Alan Bond, Christophersquise, etc. It's not exactly the same, but there's parallels, is there.
And we spoke about it at the top about the barbarians. So that's not my term. It's not our term. It's made famous by a book. A couple of former Wall Street Journal reporters wrote the book about Barbarians of the Gate. That was the US company KKR acquiring it's been to acquire US food company conglomerate at a time called an Abisco and tracking that coming in, stripping the assets, selling it off and leaving a very capital light business.
Yeah.
So this was the benchmark if you like this, when everyone's realized what the game was.
And KKR they're still around.
In fact, they have funds listed on our share market, and that might be listeners on the show that even have investments in them. So it's a two sided thing. But I don't want to go to that just now. I just want to capture a few other things about this. So for most people when they look at the share market, most of the intention and most of the action is in a small number of companies. The top fifty and one of the things we've seen is how private acuity
will come in. I think in our country or in our market, the benchmark, the NJO and the.
BISCO of our area was Meyer.
Once upon a time, I think it was TPG if I've got that right, who came in and did an amazing deal for themselves, and there was all sorts of controversy later as to what they did and how they did it. More recently, had Sydney Airport a beautiful stock, a fabulous asset that investors loved, long term infrastructure play again that was shipped off the market and that was big super funds playing with private equity again, correct me if I'm wrong on this.
And then this most recent one, this.
Health scope, which is when everything went wrong, is private equity getting it wrong themselves, But it seems to be a process that's accelerating now. Is the ASEX particularly vulnerable to this? And as ordinary shareholders, how do we deal with this fact that these marauding you know, global companies just cherry pick like this.
Well, I was just thinking, well, look there's phrase my old economics teachers to drum into me. He said that in order for someone to buy something. Someone has to sell something. So if somebody is paying over the odds for an asset, well you know that's they've got to wear the risk. But it does come back to some of the issues. I mean, can you know this is
a broader question. Can someone come in by a hospital and sell off all the furniture and cut all the stuff and then there's a lot of consequences around that too, because that ultimately puts pressure back onto the public system. And we don't have time to talk about all that what's going on in there. But your earlier point about these quality companies, I was just checking out a list, so you're right. Sydney Airport Minerals. These are companies that
have left the AX in the last few years. City Airport, Odds Minerals. There were Spark Infrastructure, so that was a pretty boring company that no one had ever heard about. Boring but nice, nice sort of yield stock. We've seen a whole bunch of holding out of industrials and through other companies. This is not all private equity acquisitions. Borrel CSR James Hardy. There's a drama about it.
Relocated builders, isn't it, Eric, That's the entire building materials sector.
Yeah, and of what was the a SX, which were.
All Greek companies and popular with private investors up to the time they were taken US.
So look, you know that happens, and as long as there's stock markets, there's always acquisitions. Nothing wrong with acquisitions. But what's the structural sort of issue that's been happening is that Australia or the ASEX hasn't been able to replenish the companies that are leaving the AX and that's
starting to become an issue. And that's why you're started to see companies like CBA, you know, you know trading at your that are wise sky high because it's just not the man is just not the avenues to pack your money.
Really interesting, Yes, that is an interesting explanation of what's going on. Look, take a short break because I want to come back, and what I want to do is try and guide our listeners to how to deal with this and particularly what's going to happen next in terms of private equity and takeover merchants on the ASEX and how you play this. Hello, welcome back to The Australian's Money Puzzle podcast. I'm James Kirby talking to Eric Johnson, my colleague on The Australian.
He's been on the show before.
He's been covering this really interesting area of large Australian, famous Australian shares basically disappearing.
Off the market for one reason or another.
And this share markt is actually shrinking, that is, the asex is shrinking. Now, if you are an investor to some extent your interest here, as Eric said, do you take the money and run? Why wouldn't you if someone offers you, you know, forty percent more than they did the day before for a stock and why wouldn't you take that cash? Each deal in and of itself is logical at the time. I just wonder, Eric, particularly about
health Scope. You wonder, without getting into social or cultural conversation, just strictly as an investment question, whether the troubles you know, in age care stocks which have been severe, health care stocks which are exceptionally severe now with the receivership of a company that was once worth six billion dollars, You wonder, as an investor, is this area just too much trouble as long term investment.
It's a really difficult one because one of the big themes that you speak to the likes of, you know, the global asset managers, you know, your black Rocks, your black styles, saving macquaries and so on. The big several themes. They talk about digitization, they talk about technology and AI. Health and aging always comes up as a big theme as an area to invest in. Yet the names that you've sort of pointed out, and the sectors you pointed out,
they're really difficult. They're really difficult. They like it as a theme because we're all getting older.
Yeah, it's top down, a top down thematic sounds good right bottom.
Up, it sounds really good. But we are getting older and we're demanding more services. However, we're not seeing private organizations aren't seeing that. It's again, I think it's a complicated because we're also confusing heavily regulated sector with you know, we're coming against regulation right rightly. So there should be regulation, there should be minimum staffing in age care, there should
be certain standards and so on. That's a given. However, where those themes are coming in, they're not sort of compatible with that heavy re agent. So that's where it's going. I think health scope and this is all private hospitals too, facing another challenge in that when even back in twenty nineteen or twenty seventeen, or you know last decade, when you went in for your knee repair, James, so you could play football on the weekend, you were in usually
for about four or five days. You're in, you stayed in and your health insurer, because you have the Gold coverage, was paying it all. However, today you go in the morning and you're out by three pm in the afternoon. You're playing footy on the weekend too, And that's the advance of changes in technology.
Right, productivity inside healthcare has had the surprise I'll come that it's just explaining for my that's a problem financially.
Well because then me as health Scope, I own this heavy, huge hospital that is no longer in full demand all the time. So there's another area like also, surgeons are not tied to specific hospitals. As you know, you went to your surgeon to get your knee fixed, he referred you to this day to a day care clinic down the road, so that you're not even going to the health hospital. So they're sitting there with empty rooms and empty beds, still paying their debt and their bills.
That also happened, So that came on the back of post COVID almost or at least the same time.
So you have those two things working against them.
I suppos a big question then, Eric is from again from an investment perspective, Maybe an investor can simply choose to play the other side. You mentioned KK or you can now invest in they all have, all the big
players have ASX listed funds. And in recent times by that I mean the last two years, there's been a really big push by private equity funds to the average retail investor, to mom and dad, and to say, look, your super fund has always been in here, They've done really wear private equity come and join us, and you can just simply buy, you know whatever, a thousand dollars both of private equity fund number one, two or three.
They're very common. They health scope crisis facing brook Field is that What does that tell us about private equity funds and the risks that they might put in front of the average investor that aren't so obvious.
Yeah, Look for the average investor, the punter, the retail investor. As you always to your listeners, you have a broad mix, you have your low risk, you have your mid risk and maybe just a fraction too of higher risk, and private equity as an asset class is expensive. It's high cost, but it promises higher return.
Yeah, right, high risk hy return or at least they're elevated risk elevator return.
Yeah, and for every sort of health scope, which is a spectacular disaster, and even Maya and there's a lot of high profile Dick Smith was another that was a disaster for private equity. There's probably about one hundred little no name companies that are actually that are actually that actually works, and these aren't necessarily listed companies. And private equity it does have a role, and we can't say
as a rule private equity is all bad. It does provide funding at funding source and alternat funding source and potentially a pathway for a more established and sophisticated sort of investment case. Where it does go bad is when they come in they sell off all the furniture and leave a very light, heavily leveraged business. And look, that's really short term. That's a really short term model. And if you keep doing that, you're going to run out of run away pretty quickly.
Which seems to be exactly what happened at the school.
Tell me the big super funds, what are they good guys or bad guys here depending on.
The day I'd see of the day.
Really so like some of that list that we spoke about, so Spark and Sydney Airport, I mean that they were super fun led acquisition, so they're buyouts. Their investment horizon is different, so generally it looks to like three to five year turnaround case. Another one with Virgin Australia at the airline was on the cusp of listings that was brought from administration where no one wanted to touch it by private equity and it's held onto it for now. What
is it about five years? Bang on at times times spot on. I don't think that the great guys they've made it. They've made an absolute windfall on the back of this, but they took the risk. They took the risk when no one wanted to.
That was an example where it brooks really nicely.
I mean we get to retain a second major airline domestically and investors took the risk, as you see, and anyone.
Who was in on that did very well well.
This is to some extent dependent on the flat what would happen soon enough, you would expect if they got their docks in a role there, haven't they?
Yeah? And look, you know, is to the original question about is superis of the bad guys? So their investment horizon that they buy and hold for the long term ten ten to twenty years. So if Ozzie Super came in, they did team up with a private equity fund and in doing that there aim was to be patient capital. We're going to buy this thing and hold on to it. So they probably wouldn't have flogged the assets to the extent it did.
They probably mentioned in your piece that they did intervene one time and save what's it origin from?
Yeah, so, and that that's a really interesting sceory. And that was a case of where investors, Australia investors, some Australia investors. I was in Super and there was a couple others behind it stood up and said no. Because often when private equity comes in and offers that forty percent premium for something, it's not doing it in our the goodness of its heart and often jumps on companies when they're trading at cyclical lows or you know they've
had they've made some bad calls or something. So so there's shares a way off, so footy percent premium looks pretty healthy to to where it is today, but it looks pretty ordinary to where it was five years ago. So so in that case, Brookfield did come up its plan for Origin, big energy company. The plan was to buy it and carve it up and flip it into several funds. Ironically, Canadian Prime Minister Mark Corney was was the face, the friendly face of one of these funds,
and he was he was leading the acquisition. So that Bank of England, Bank of England, that's right, I see. However, Australian Super stood up and said, look what you're offering is I was it was around about nine dollars mark what you're offering for Origin. We think over the long term Origin is worth a lot more. It has these key key quality assets, key quality attributes about it. I was. He Super had it it was able to to sort of and asked what's called a blocking the stake just
under it, and had a couple other friends. It was determined, we're not interested in negotiating. We think this business is great for we're buying and holding, so see you later. And Brookfield tried everything and tried every trick in the book, but ultimately had to take its bat and ball and go home. It could not buy it.
Right, Interesting, So they can the big super funds can exercise enormous power obviously in these situations and the episodes where they were very useful to the local market.
And the postcript to that is that Ossie Super was right that the shares ultimately increased over the offer price over time. It didn't happen straight away, but it gradually stopped having that direction.
That's the ultimate test, isn't it really? Very interesting? Very interesting? Okay, So Origin is an example. Really, Origin Energy is an example. Folks for private equity might have done awfully well and in some extent plunder the AESX. Again, in that case, Australia Super came in and saved the day. We now know because of the movement and price since that time. So interesting, two says to every story. All right, we'd be back in a moment. We have some really good
questions from David and Neil and Trevor. Hello, welcome back to The Australian's Money Puzzled podcast. James Kirby here talking to Eric Johnson. We've been talking about something I think is really was really worth looking.
At today, which is what's going on big picture.
If you like on the AX, where we depend so much on a couple of dozen companies and they are vulnerable. It's the very open market, and that's all fine, but
sometimes we as individual shareholders, we do lose. Right, So Sydney Airport whipped away from under our eyes, and everyone I think regrets that health scope of five billion dollar company was also whipped away from under our eyes, and we might have been better off because it turns out that it's in receivership, so we're are that five billion dollars go?
Well, individual shareholders didn't lose it. At least that's useful.
Okay, David asks, I was interested in your recent episode on gold. Your guest quoted some interesting figures for returns. Who didn't mention the digital gold bitcoin. I've owned both for years, and bitcoin outperforms gold. And then David says, I asked chat GPT to perform an analysis. I don't know if I completely agree with that term, and it said bitcoin has delivered significantly higher returns over the past
decade compared to gold. That is, but gold has been more stable surely this would have been worth a mention, says David, given the assertion that gold is the hot investment product. It's just plain wrong. Okay, David, never advice information only. They're both pretty good, first of all. And if bitcoin at a certain point in time has delivered more on a ten year basis than gold, I don't deny that for a moment, So put that on the table.
It's just a question of your choice. Really, I think the more interesting part of the question is using AI to get some steer. Look, I don't think there's anything wrong with it. I just I would just say to David and all the debts out there, it's it's uninterpreted information. It's information. It's uninterpreted. That's why we have short like this, And I'd be careful how far you go with AI. Aren't testing your investment hypothesis in real life?
What do you think, Eric, Yeah, I look one hundred percent on that, and it's a it's about garbage in and garbage out in terms of the algorithm, and sometimes it's quality of stuff. But you just don't know what what ingredients been put in there, So so use it for for something, don't rely on it. Becoin. It's really interesting. It's a it's a trying to find a correlation to bigcoin, and that's been the big struggle. So, so is it a global economic trend?
Just you might just explain what you mean by that.
So, so how does it move? So does it? So? Why does it move? I think that So does it move when the economy is booming, doesn't move when the economy is slow. So we think about gold. So whenever there's inflation explosion, gold goes up. Everyone rushes. Gold is a hedge against inflation. And we've also seen that recently with gold with uncertainty about the US US bonds and the US treasuries as a store of As a store
of value, bitcoin struggles a bit. There is a thread that when there's an excess of money in the financial system that actually booms. So you know, I've got to spare whatever I can't invest that and that then that supports it. But again it comes back to demand now and we're increasingly saying obviously when Trump came in, we saw a big jump in bitcoin because Trumps saying we're gonna We're going.
To Yeah, more than that, he's very keen, he's very keen altogether.
Is he launching his own coins?
Yeah? Correct, So so that that's the type of thing, so you know, whatever it is comes to Also, like gold, bitcoin doesn't pay yield and it depends what you It doesn't pay an income, so it's like buying them debartwork and hanging on the wall.
So you're saying that gold as what has the history that we know has repeatedly proven itself to be a useful non correlated asset in that when the market's going down, gold should go up. But bitcoin it's unclear whether it's unclear still.
Yeah, the trend, like the history isn't there, and the liquidity isn't there, and it will become and it will become a lot clearer over time. And I think it is it's a legitimate asset class today because of the sheep value of it.
That's interesting and it's suggesting you say that. Okay, very interesting.
I hope that was useful to you, David from Neil, which is my question could be a podcast topic. What is productivity? How is it measured? What does the productivity Commission do? And why does it matter to invest us? It's a great question. Neil always comes up doesn't it, And I think does economic explanation, which is it's not rocket science, yes, would be boy efficiency.
But for investors, why does it matter? I think that's the interesting one. Eric.
How would it reveal it if a company was productive? How would it reveal itself as a listed stock? Would there be some numbers that would be obvious?
Is it just profit? Is it simply more profitable or what we were to play in?
Yeah, So when you know what the top of that question about what does it look like and what does it do? It reminds me of a very famous newspaper cartoonist, Bruce Petty based in Melbourne, and he used to draw these amazing images about the economy and what the economy looked like, all these crazy machines that no one really knew what they look like or what they were, but
they did something. That's the economy. Productivity is much like this, much the same, but productivity, And it was talked about why does it matter? Because it matters. Everything matters, and it all comes back to productivity. So how what makes a productive company? So there's a couple of measures. Obviously you compare like for like apples for apples. So we're very lucky in Australia that we have the big four banks,
we could relatively vanilla, relatively comparable. So cost to income ratio would be one fact.
Yeah okay, and then the one that has the what are you looking for, the one with the lowest.
Yeah, one lower, And this measure would generally move around if you're so you're the amount of revenue that comes in and compared to the amount of your cost base. So for example, you know, West west Pac runs around about sort of mid forties cost to income ratio, whereas Common Bank runs is sort of like a high thirties.
So it's a much better ratio because the lower the better, even though it's a much bigger bank where big.
Go Combank is No, but that means Combank is more efficient.
So the LA what I said, yeah, come make is more efficient even though it's bigger. So that's your That's how it translates to in a stock how productivity kicks in as a useful measure for a listed.
Company, and so retailing and is another area. So you tend to look at profit margin, your net margin or your gross margin, and so that's the amount of profit relative that you're making. And so we're looking at Maya this week, and that's quite interesting. So it's it runs a margin of about two percent, So so from everything it's selling roughly, the profit it's making on that is about two percent. Where whereas it, as you know, recently bought the Solomon lose A Power Brands business and the
profit margins that's making is around nine percent. So every pair of genes it sells and just gens is making around nine percent. So my wants to get a bit of that margin, and a little bit of that increase in margin will translate to a big change in headline profit. In fact, my was promising if you can lift its margin by just one percent on that two percent, that translated to a thirty three million dollar EBIT of earnings increase.
So a street mathematical. If the margin's improved, the profits improve, the share place of improve.
Yeah, but here it goes and look in the big structural thing that's coming around, you can't go. You can't see any company briefing today without a CEO getting up and talking about AI and the prospect. So look, it is coming. It is real. It's not here in a big way yet, but it is here a way, and companies are just flexing it and starting to figure out. And we heard the Teltra boss Vicky Brady this week at a strategy briefing. She was quite open about it.
She said, look, by the end of the decade, the way the Telterra looks, it will employ less people from what it does today. And that was the basis that AI will do a lot of work that is done manually today. So that's one aspect that we will start seeing an impact on the cost space.
So neil big issue at the moment is AI on the basis that obviously if someone can do what they used to do in six hours in two hours or two minutes, depending on what the promise is for MEI you can see how to cut straight through to profits.
Yeah.
Yeah, And I think when Neil would be really good exercise for Neil is if he want to get ahead of the pack on it is to have a look at the big companies that are and how they're talking about their use of AI and how they're applying AI today because that may not translate to something today, but in two or three is time, it may translate to something pretty significant. Right.
Yes, those who master AI will master the universe. Okay, terrific. We may we've just went out of time, so I think we might just leave it there for today. Great to have you on, Eric Johnson, associated is a bus that's from the Australian.
Thanks James, nice to be here.
Thanks very much for coming on the show. And let's have some more correspondents. And usually we'll call out this week in that I have lots of emails flowing in, but you know what, folks, some questions.
That aren't about the supertax would be particularly welcome because it's a flooding the inbox.
And we will cover them. As you know, we've covered them in special shows and there's more to come. I'm sure on that one.
But there are other issues too, So let's hear from you the money Puzzle at the Australian dot com dot au.
Talk to you soon,