The cash and shares counter offer from Primary Health Properties PLC (LSE:PHP, OTC:PHPRF) to Assura Group (LSE:AGR) has additional merits and potential greater future value, according to analysts, despite being below an all-cash offer from a US consortium led by KKR.
PHP's offer "should be the preferred option for shareholders", said broker Panmure Liberum.
The implied value of 46.2p of the PHP offer may compare to the KKR bid of 49.4p, but the broker said the FTSE 250 REIT's offer includes several positive elements that the rival private equity bid does not.
Assura's assets are "socially critical infrastructure which could be monopolised" by private equity, that a combination with PHP will result in significant cost and operating synergies and that the new, scaled business will benefit from a lower cost of capital.
Based on the broker's mid-term sustainable earnings of 3.3p, which doesn’t include future development resumption, PHP’s bid implies a 7.1% yield with upside again from cost synergies and lower capital costs due to scale, the Panmure Liberum analysts said, "which shareholders would be giving away by selling to KKR".
The analysts said the assets the pair owns are "socially critical infrastructure that will continue to see rental value appreciation over the long term as the population ages, population medical ailments become more prevalent and as PMI and self-pay continues to grow".
The bid from KKR "implies no goodwill in the takeout, goodwill which is equally present in the PHP portfolio".
"If shareholders really just wanted cash for their NAV they could sell the assets piecemeal.
"In our view, we wouldn’t sell our water supply (or would we? KKR are bidding for that too), so why would we sell our healthcare facilities. We think the current share prices do not reflect the long term prospects for rental value."
Analysts at Shore Capital also said the PHP offer "has additional merits and potential greater future value".
The combined entity, which would be the sixth largest UK REIT, with a market cap of £2.7 billion and a £6 billion specialist health focused portfolio where most of the rent roll is underpinned by government institutions such as the NHS.
Shore Cap also agreed that the primary care sector looks "well placed" to benefit from rising rents as reviews start to capture the effects of previous cost inflation in construction, while also being "poised to see a resumption in development activity" under a Labour government.
"Furthermore, PHP already has a track record in doing listed M&A deals and looks well positioned to deliver potential upside – that can additionally come from a re-rating of its shares," which the Shore Cap analysts noted were currently on an 11% discount to 2025 forecast NTA but have averaged a 12% premium over the past five years.
"Collectively these attractions could give PHP a significant advantage over the current KKR cash offer and generate materially more upside in future value creation."