Primary Health Properties has made an indicative cash and share proposal for Assura, based on a NAV for NAV exchange ratio.

Under the terms of the combination, shareholders of Assura would receive 0.3848 new PHP shares and 9.08p in cash.

PHP said it will make a mix and match facility available to Assura shareholders in order to provide flexibility by enabling them to elect to vary the proportions in which they receive new PHP shares and cash.

In addition, Assura shareholders would be able to retain the quarterly dividend of 0.84p per share which is due to be paid on 9 April 2025.

Based on the PHP closing share price of 94.35p on 2 April 2025, the 9.08p cash consideration would represent 20% of the total consideration. The combination implies an initial value of 46.2p for each Assura share, including the 0.84p dividend, and values Assura’s entire issued and to be issued ordinary share capital at around £1.5bn.

This is lower than the 49.4p offer made for Assura by KKR and Stonepeak.

The implied offer price represents:

• a 6.5% discount to Assura’s EPRA net tangible assets of 49.4p;
• a premium of 23.5% to Assura’s closing share price of 37.4p on 13 February 2025 (being the last business day prior to the commencement of Assura’s offer period);
• a premium of 25.2% to the one-month volume weighted average Assura share price of 36.9p; and
• a premium of 22.2% to the three-month volume weighted average Assura share price of 37.8p.

Following completion of the combination, Assura shareholders would hold approximately 48% of the combined group’s issued share capital.

The board of PHP said that shareholders should opt for its offer over the KKR/Stonepeak bid because it believes that a combination of Assura and PHP would deliver significant strategic and financial benefits for both sets of shareholders.

[QD comment: If a merger offer is finalised, shareholders will decide between a cash exit at NAV or to remain invested in the primary healthcare sector, which benefits from demographic changes, a structural supply/demand imbalance, and backing from the Labour government and policymakers. Synergies between the two companies are obvious and a merger would benefit both sets of shareholders with cost savings as well as improved liquidity in the shares of the enlarged group. However, the combined group’s debt position would be swollen and would need to be addressed.]

PHP argues that benefits of the merger include:

• Creating a UK REIT of significant scale (eighth largest UK listed REIT) benefiting from increased public markets presence, greater index weighting and improved investor flows;
• Creating a specialist of greater scale in a growth sector, underpinned by critical infrastructure assets, supported by government policy placing greater focus on primary care and increasing the demand for modern healthcare facilities;
• A combined £6bn portfolio of long-leased, sustainable infrastructure assets principally let to government tenants and leading UK providers, benefiting from increased income security, longevity, diversity of product type, geography and mix of rent review types;
• Ability to benefit from the improving rental growth outlook reflecting the significant increases in construction costs in recent years together with the historically suppressed levels of open market rental value growth in the sector;
• Significant cost and operating synergies, supporting expected earnings accretion and dividend growth for both companies, with the combined group expected to have one of the lowest EPRA Cost Ratios in the sector;
• Improved access to capital markets, both debt and equity, with potential cost of capital benefits due to enhanced scale, liquidity and diversity;
• Embedded value of the low fixed cost, long-term, debt facilities of both Assura and PHP valued at 5.5 pence per share as at 30 September 2024 and 9.4 pence per share as at 31 December 2024 respectively, which is expected to be largely retained in the Combination to the benefit of the enlarged group’s shareholders;
• Enhanced ability to pursue select developments, with operational synergies; and
• ‘Best of both’ management approach, leveraging the significant experience and expertise of the combined management team and boards.

Furthermore, the board said that a return to a discount to NAV rating provides potential for significant further valuation upside. PHP has for many years traded at a premium rating compared to Assura. On a five-year average basis, PHP has traded at a 12% premium to NTA, compared to an 8% premium to NTA for Assura, and over three years a discount to NTA of 4% compared to 10%. The board of PHP believes that an improved rating and longer-term value can be generated through the creation of a stronger combined group with enhanced growth driven by two highly complementary property portfolios with a lower cost of capital.

Financial effects of the combination

The combination is based on an adjusted NTA to adjusted NTA ratio, taking into account the respective fair value of fixed cost debt of each company. The combination is expected to be adjusted NTA neutral (pre-transaction costs), while providing Assura with credit for its proportionally higher embedded fair value of debt.

The combination is expected to be earnings enhancing in the first full financial year post completion.

The cash consideration will be fully financed through new third-party debt for which PHP is in discussions with a number of lenders. Following the combination, PHP’s loan to value (LTV) ratio is expected to be initially above its target of between 40% and 50% with the expectation that the combined group’s leverage would return to within the target range within 12 to 18 months of completion of the combination. PHP said that it was actively engaged in discussions with potential partners to reduce leverage following completion of the transaction to return to the target LTV ratio and is confident that the combined group would continue to benefit from an Investment Grade credit rating.