Pihlajalinna (PIHLIS) – Merger and Arbitrage – 27% Upside

Current price: €12.62

Offer price: €16.00 in cash

Upside: 27%

Expected closing: Q3 ’20

Offer document

This idea was shared by Lars.

 

This is a merger between two major Finnish healthcare service providers. Pihlajalinna (listed on Nasdaq Nordic) privately held Mehiläinen for €16.00 in cash. Tender offer started on the 9th of Jan and will expire on the 10th of July (extended from 19th of March). If the transaction doesn’t get closed by Nov’19, both companies can terminate the merger.

There are two main conditions:

• 90% acceptance rate. If reached, squeeze out will follow. 63.2% of shareholders (including all major holders) have already tendered their shares. This type of tender offers is apparently a standard and most common practice in Finland. The threshold is high, but should be reachable given the current support from the board and major shareholders. Moreover, PIHLIS is facing serious competition challenges from the two major players (Terveystalo and Mehiläinen), while the growth through acquisitions is limited. Pihlajalinna strategy was based on getting a good share of the health care sector reform, but that plan has been scrapped by the government . That means that their only avenue for growth is closed. The current market situation and 23% premium to the last-close price should also give the shareholders some incentive to vote in favour.
• Regulatory approval. This is a main issue as the merger has to get a blessing from FCCA (Finnish antitrust body).

 

Few points on antitrust risk

• FCCA has initiated a Phase 2 investigation on the 12th of March. This was expected by the companies and they seem to be confident in the eventual approval after the Phase 2.
• Nonetheless, it seems that the scale of the transaction is attracting opposition in the media, while the Finnish Medical Association has also expressed concerns about the decreasing competition.
• In H2’18 there was a similar acquisition between peers – Terveystalo has acquired healthcare operations of Attendo. This was a €233m transaction (vs €360m for PIHLIS) and antitrust was also a key concern here – based on the initial review regulators have assumed that the transaction will have “an adverse effect on the competition”. The approval was eventually received (took 7 months) yet it also had to go through Phase 2. Although it is also stated that an extension was required because regulators needed more time due to healthcare reform that had to be implemented, but eventually failed last year. The main argument in favour of the approval for the peer merger was that essentially both companies provide different services for different customer groups (The buyer focused more on occupational healthcare for corporate and specialized care for public sectors, while the target was strong mostly in primary healthcare for for public sector).
• In comparison to peer transaction, the overlap between Mehiläinen/PIHLIS seems to be higher – both focus mainly on public sector and primary healthcare services. Moreover, the size is seems to be a bit larger (the combined company will have €1.4bn of revenues (vs €924m estimated for Terveystalo/Attendo), while the industry itself is already in a later stage of consolidation.
• So on one hand the combination will further increase the presence of the two major players (Terveystalo and Mehiläinen), but on the other hand, health care in Finland is still dominated by a really strong public health care system. That is not expected to change anytime soon and with the current coronavirus situation ongoing, it just proves how important it is to have a high quality public health care system.
• Before the market fall, the spread used to trade at 4%, which given the 90% approval rate indicates that the market was fairly confident in the regulatory blessing.

 

Short overview of the companies

Mehiläinen – provides private healthcare services to corporate – 27%, private – 26% and public – 47% sectors in Finland. Mostly focuses on primary (public) and occupational (corporate) healthcare. Revenue wise, it is about 2x larger that the target company.

Pihlajalinna – also provides private healthcare services to the same segments, but focuses more on the public sector (specialized and primary):  private – 17%, public – 64% corporate – 19% and  insurance – 5%. ’19 revenue was €518m.