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Mediclinic’s [LON:MDC] unsolicited takeover bid for Spire Healthcare [LON:SPI] undervalues the UK-based private healthcare provider, according to a top-14 shareholder and a minority investor in the target.

A third investor, also owning a minority position, called the proposed bid “cheeky”.

Although Spire’s share price has been weighed down by legal costs related to a surgeon jailed for carrying out unnecessary operations, investors said the company’s long-term prospects were bright due to bourgeoning demand for private healthcare in the UK.

Spire rejected top shareholder Mediclinic’s offer as “severely” undervalued when the offer was made public on 23 October. Mediclinic, which already owns 29.9% of Spire, on 18 October offered to buy the remaining shares for a mixed cash and equity consideration equivalent to 298.6 pence/share based on Mediclinic's share close on 20 October.

Spire Healthcare will engage with a bidder only if an improved offer is well north of GBP 3 per share, this newswire reported earlier this week, citing a source close to the deal.

The takeover bid followed a September 2017 trading announcement that the company’s first-half profit slumped 75% due to the legal charges.

Etienne Roux, an investment analyst at Truffle Asset Management, echoed Spire’s view, saying that Mediclinic is fundamentally undervaluing Spire. Truffle Asset Management had a 1.09% stake in Spire as of 1 August, making the firm Spire’s 14th largest shareholder. Truffle is also a minority shareholder in Mediclinic.

“Our view is that there’s long-term fundamental potential for Spire in the UK market,” said Roux, adding that a funding shortfall at state-run National Health Service was driving demand for private healthcare in the UK.

“And Spire is in a good position to participate in this upside,” Roux said. The UK market presents a long-term opportunity for Mediclinic at a time when it is facing challenges in the markets it operates in – Switzerland, South Africa and the UAE, said Roux.

Mediclinic and Spire declined to comment.

“We remain positive about the long-term prospects for Spire Healthcare notwithstanding some near-term challenges,” said minority shareholder Aslam Dalvi, associate portfolio manager at Kagiso Asset Management. “As a key player in the UK private healthcare market, Spire’s future prospects therefore remain very strong, with the company well-positioned to capitalise on this fundamental transferral towards the private sector over time.”

Although shareholders would make a profit off of Spire’s 2014 listing price of 210 pence per share on the London Stock Exchange, UK institutional investors are unlikely to accept Mediclinic’s current offer, the first minority shareholder said.

A fairer reflection of Spire’s value would be the stock’s trading level through the year, Roux said. Spire’s shares largely traded between 300 pence and 350 pence between January 2017 and the September 2017 trading update.

Mediclinic itself bought its near 30% stake in Spire at a higher price than its proposed takeover offer, said the first minority shareholder, adding that this would give Spire’s board leverage to hold out for a higher price.

Mediclinic bought its stake in Spire in a GBP 432m deal in June 2015, valuing Spire at 360 pence/share. Using Spire’s reported adjusted EBITDA for FY14, the stake acquisition valued Spire at 11.7x EV/EBITDA, according to Dealreporter analytics.

A takeover offer of 12x-15x EV/EBITDA would be appropriate for a business of Spire’s size, said the first minority shareholder.

Mediclinic’s offer reflects an EV/EBITDA valuation of 10.2x, according to Dealreporter analytics. At Spire’s 52-week high of GBP 3.85/share, it was valued at 12.33x that metric.

A bigger cash component might make the offer more attractive to shareholders, said Roux, explaining that Mediclinic equity is less desirable because its share price has been under pressure. Mediclinic shares have lost about 22% of their value this year.

However, Mediclinic is unlikely to be able to offer more cash, given its gearing, Roux said. A takeover at the current offer price could push Mediclinic’s net debt/EBITDA multiple to 3.8x from 3.3x once the company deploys GBP 421.2m in cash consideration, according to Dealreporter analytics.

Roux cautioned that there were unlikely to be large synergies from the potential combination.

For starters, there are not likely to be any back office or cost savings, he said, referring to the lack of geographical overlap between the two companies.

Mediclinic operates 50 hospitals and over two day-clinics across South Africa, and three hospitals in Namibia. The company has a stake in Switzerland's private hospital group Hirslanden AG, which operates 20 private acute care facilities and four clinics in Switzerland. Mediclinic also operates five hospitals and 40 clinics in the United Arab Emirates.

On the other hand, Spire provides in-patient, day care and out-patient care for 40 hospitals, 10 clinics and over two specialist care centres across the UK. The company owns and operates a sports medicine, physiotherapy and rehabilitation brand, besides a screening service and also has national pathology services.

There could be synergies from taking best practices from Switzerland, South Africa and the UAE to the UK, or vice versa, Roux said, adding that he wouldn’t “put a big number on it.”

by Swetha Gopinath with analytics by Amit Rawtani, CFA