Brazilian hospital chain NotreDame buys Centro Clínico Gaúcho for US$211 million

RIO DE JANEIRO, BRAZIL – NotreDame Intermédica (GNDI3) on Monday, June 7, notified the market that it had completed the purchase of the entire stock of Centro Clínico Gaúcho (CCG) on June 4, in a transaction worth “R$1.06 billion (US$211 million), paid in cash, net indebtedness discounted and a portion retained for contingencies.”

Centro Clínico Gaúcho has its own network that includes 175,000 beneficiaries, 20 clinical centers, 13 clinical tests units and the Humaniza Hospital. Last year, its consolidated net revenue reached R$371 million.

According to NotreDame, considering synergies, the implied multiple of the acquisition would be a firm value (EV) on earnings before interest, taxes, depreciation and amortization (EBITDA) of 9.8 times or EV/sales of 2.9 times – compared to NotreDame’s current valuation with EV/EBITDA expected for 2021 of 24.4 times and EV/Sales expected for 2021 of 4 times, according to XP’s analysis.

XP notes it sees the move as positive as NotreDame expands its domestic presence for an attractive price. “While short-term results should remain pressured by higher claims, we remain optimistic about the company’s growth prospects with greater organic and inorganic market consolidation. In addition, the potential merger with Hapvida (HAPV3) adds even more value to an already compelling story,” they point out. The analysts reiterate a buy recommendation and target price of R$117 per share.

Morgan Stanley’s review

It is worthy of note that before the acquisition was announced, Morgan Stanley updated its models for NotreDame and Hapvida taking into account the release of first quarter results. Thus, the bank included the final merger terms of the companies, and the prospect of a more difficult year, as the hospital sector may face a worse than expected impact from the Covid-19 pandemic. In addition, pricing may be unattractive due to product mix and price reductions for individual plans, which may reduce EBITDA in the 2021 fiscal year for companies in the medical sector.

The normalization of elective procedures has increased the use of medical services, such as ICU beds and laboratory tests, raising the prices of medical supplies, which may lead to a 12% reduction in Hapvida’s EBITDA and a 29% reduction in NotreDame’s in the 2021 fiscal year compared to the last one.

The bank estimates a R$32 billion value generation from the merger of Hapvida and NotreDame, compared to the previous estimate of R$44 billion. The bank recognizes a weak revenue moment, and lack of clear communication about potential synergies, which could hinder a short-term revaluation of the companies. EBITDA was reduced by 17% for Hapvida, and 39% for NotreDame.

The bank continues to prefer the medical over the dental sector, and maintains an overweight recommendation for Hapvida and NotreDame, with a price target of R$19.70 for the former, compared to R$15.78 at Friday’s closing, and R$110.4 for the latter, compared to R$86.1 at Friday’s closing.

The NotreDame Intermédica Group is a Brazilian pioneer in preventive medicine and offers solutions in health and odontology. Founded in 1968 and with headquarters in São Paulo, the group employs more than 14,000 people.

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