Medibank Private could be first sale of many
Over the next two months, as the Abbott government hunts for budget ballast in every nook and cranny, it is considering how best to sell Australia’s largest private health insurer, the government-owned Medibank Private.
Finance Minister Mathias Cormann received a scoping study last week that weighed up the options between a trade sale and public float. Either way, the move is tipped to earn the government $3-$4 billion. (Early reports that the scoping study recommended a trade sale have been treated with a degree of scepticism by market players, who believe a sharemarket listing more likely.)
The government must now consider whether the public relations success of a public float would outweigh the potentially higher price attracted in a trade sale. Treasurer Joe Hockey has announced that Medibank Private will be the first of a swath of assets to be put up for sale by the Coalition.
With the sale of an iconic government business on the table (Qantas notwithstanding) it is worth considering the Commonwealth’s track record on privatisations. Past federal governments have a history of listing well-recognised brands in public floats – in part to mitigate general community distaste for government sell-offs.
The Commonwealth Bank and Telstra were household names sold directly to investors via a sharemarket listing rather than a trade sale. As strong retail brands with millions of customers, they attracted flocks of mum-and-dad investors, and are still among the most widely held shares in the market. State governments, by comparison, have more commonly sold assets via trade sale.
Listing former government assets on the sharemarket is seen as a way of distributing the wealth as widely as possible, which softens fears that once the companies are freed from government control, branch closures and job losses will follow. With Medibank Private’s 3.8 million members, not to mention a float-hungry local market, a public listing should attract widespread interest from small retail investors – just as Telstra did for the previous Coalition government.
Past government floats have, on occasion, been wildly successful. In 1994, CSL, a then obscure blood products group, listed at $2.30 a share. This week it was trading above $71. In 1991, one-third of the Commonwealth Bank was listed at $5.40 a share, with the remainder sold off over the next few years. The bank’s shares are now trading around $75. (To put that in perspective, BHP’s share price was between $7 and $9 in 1994; this week it is nearing $38.)
Of course, Qantas is a different story entirely, with its share price currently wallowing at nearly half its listing price.
Medibank Private has a stronghold over nearly one-third of Australia’s private health insurance market, but competition is fierce. The average net margin in the sector last year was just 4.2 per cent, while pricing is heavily regulated for all players. These factors make it difficult to argue that it holds the kind of special role in the economy that justifies ongoing public ownership.
And while the government says the 2006 Medibank Private Sale Act gives it authority to offload the health insurer, it remains to be seen whether the Senate can or will attempt to impose any restrictions.
There’s no doubt a float of Medibank Private, if priced conservatively, would be widely welcomed in the Australian market. Particularly given there are regular complaints about the narrowness of the local market, dominated as it is by miners and banks. With a number of healthcare companies already listed, the upcoming float of hospitals group Healthscope and the possible inclusion of Medibank would establish a substantial healthcare sector.
A straightforward public listing could take as little as three to four months to prepare and bankers approached by The Saturday Paper expressed hopes that a listing could take place before the end of the year. But as expectations mount, questions have been asked about whether Medibank’s small health-services arm, Health Solutions, will be spun off as a separate trade sale. Several parties are believed to have approached the Federal Government to advocate for a separate sale, arguing that a spin-off could raise the government an extra $200 million. They say a healthcare provider is not core to the insurance business.
Potential buyers are rumoured to include, among others, three overseas health groups and the Australian company Aspen Medical.
GDP up but don’t pop the champagne corks just yet
To health of another kind: there was modest rejoicing around this week’s release of the quarterly economic figures. Gross domestic product grew at an annual clip of 2.8 per cent last year after a 0.8 per cent rise in the three months to December. The result was slightly higher than expected.
One of the key drivers of economic growth, domestic spending, rose slightly thanks in part to a dip in household savings. (Australians were saving 9.7 per cent of their income at the end of last year, their lowest rate in nearly four years). But while this is a positive sign, economist Saul Eslake, from Bank of America Merrill Lynch, warns against reading too much into the December figures. The decline in consumer confidence in the first two months of this year is likely to have been compounded by more recent news of mass job cuts.
“I would expect the Westpac MI consumer sentiment survey to register a decline in March,” Eslake says. He also noted that general business investment continued to be very soft and was unlikely to make up for a foreshadowed 17 per cent decline in manufacturing capital expenditure.
He cautioned it was too early to tell whether rising house prices and an upswing in home building would lead to the same sort of sustained broad-based economic boom that it did in the previous decade. This earlier housing led-recovery coincided with a series of tax cuts and cash handouts under the previous Coalition government – something that won’t be repeated today, when household debt is much higher than it was then, Eslake notes.
“The numbers were good but I still have questions as to how they will be sustained … I find it hard to see how consumer spending, which is 62 per cent of the economy, will accelerate significantly from here.”
This article was first published in the print edition of The Saturday Paper on Mar 8, 2014 as "Medibank Private could be first sale of many". Subscribe here.