The six people who bought Dublin's Mater Private Hospital for a total of £33 million may be able to make a good capital gain on their investment after five years or more.
But there are no guarantees built into the deal and it is not based on a tax-efficient scheme, according to Mater Private chief executive Mr Mark Moran, who is one of the investors.
Under the terms of the deal, the hospital cannot be sold for at least five years and the shareholders cannot get any dividends over this period. No arrangements, such as put options with hospital consultants, are in place to sell on the business after that period.
With their initial cost of entry into the deal likely to have been low and ongoing payments to the vendors coming from the business, the investors could drive up the value of their shares significantly if they manage the operation effectively.
If they pay down debts and successfully fund and complete the planned development programme, they could eventually sell the business for significantly more than they had to invest.
Any resulting capital gain would be taxed at a rate of 20 per cent (based on current tax rates). But achieving a capital gain is not a foregone conclusion and there are significant risks and uncertainties involved.
"Ultimately we hope there will be an upside. But there is no question of a return for a minimum of five years. The deal was structured primarily to ensure continuity and the independence of the hospital," said Mr Moran. He said investors had no long-term plan in place for personal profit.
"Five years is a long time in the private medical insurance market. For a private hospital, the market is dictated by the health insurance companies which largely determine the prices paid. There are other issues such as the Competition Authority position on consultants' fees and public hospital charges for private beds. The next three years will be critical because of our major investment programme and the changes in our market," he said.
Over this period, the group will have to run the day-to-day business, pay down the existing hospital debts and new borrowings arising out of the takeover and the ongoing £24 million investment programme. This investment in state-of-the-art technology is aimed at leaving the hospital well positioned to be the first choice of patients for private healthcare.
Under the takeover deal, effectively a management buyout by four non-executive directors and two executive directors, the group will pay the Sisters of Mercy £22 million over a maximum period of 20 years and assume the hospital's existing debts of £11 million.
Some cash has been paid to the Sisters. The group was not prepared to disclose the amount involved or details of its own funding arrangements, citing confidentiality agreements. Since the up-front cash payment is likely to be have been small and the ongoing payments to the Sisters will be generated from the business, the initial investment required from the group would have been small.
Mr Moran said the timing of payments to the Sisters would depend on the performance of the hospital, but was likely to be completed well before the two-year maximum period.
The takeover group comprises the four non-executive directors brought in by the Mercy order in 1990/91 to restructure and reorganise a hospital then struggling with heavy debts. The group's chairman is former CIE chairman Mr Brian Joyce, former Hibernian chief executive and another former CIE chairman Mr Eamon Walsh, economist Mr Brendan Kearney and Dublin-based accountant Mr John Murphy. Mater Private chief financial officer Mr John Mooney and Mr Moran are the other investors.
This group now owns 85 per cent of Healthcare Holdings, the holding company for the operations of the Mater Private Hospital. Arrangements are under way to place the remaining 15 per cent in trust for hospital staff and consultants, with the shares passing free to the trust.
Technically, the deal has been structured as a long-term lease of the hospital buildings by the investor group, with the property remaining in the ownership of the Sisters. This structure was devised to ensure that the building will continue in use as a hospital with a Catholic ethos. The investors own the hospital contents and equipment and the trading entities which are the business of the hospital.
While there is no established market for hospitals here, advisers to the Sisters examined high-tech hospital deals in the US and Australia to establish a valuation based around cash-flows and earnings before interest, depreciation, tax and amortisation. The new owners have given a commitment to complete a three-year £24 million investment which started this year. Some £6 million will be spent this year, £11 million next year and £7 million in 2001.
Mr Moran said the group had the support of financial institutions and the hospital's existing bankers. Asked if the deal was structured around a tax-efficient investment scheme, he said there was no tax-efficient element involved. The hospital did not qualify for tax breaks because it was not in a tax-designated area, he said.
Asked what incentive there was for the group to take on the hospital, the debt and the development programme, he said they hoped to make a success of it.
For the investors, one of the key risks will be the pricing policies of health insurers VHI and BUPA. With health insurers controlling 85 to 95 per cent of the revenue stream of private hospitals, negotiating reasonable price deals will be crucial.
Other factors will include the impact of expected increases in healthcare insurance premiums on the numbers opting for private healthcare, the extent of medical cost inflation, and the speed of developments in medical technology with its consequences for the capital investment required.
