When Australian hospital operator Healthscope complains of ‘soft conditions’, it does not mean that robust public health has pared back patient numbers. Australia is subject to the same ageing population trend as every other western country. Healthscope’s problem lies in costs, not revenue growth.

Undeterred, Australian private equity fund BGH Capital and Canada’s Brookfield have spent the past month attempting to outbid one another for the company. On Tuesday, Healthscope’s management rejected both bids. Shareholders are right to be disappointed.

After the rejection was announced on Tuesday, shares fell 2.4 per cent to a market value of A$4.2bn ($3.2bn), roughly the midpoint of the two bids. The higher bid, at A$4.35bn ($3.3bn), valued the group’s enterprise value near 18 times ebitda (a cash earnings measure). That exceeds German group Rhön-Klinikum and local rival Ramsay Healthcare by at least a fifth. It exceeded the undisturbed share price by a quarter.

This is a good price for a company that has announced writedowns of $68m and has downgraded full-year profit expectations to A$345m. In the first half year ebitda dipped 8.8 per cent below the same period last year. Healthscope blames an unfavourable market, wage increases and disruptions in new projects. It is pinning its hopes on an efficiency drive, above-market revenue growth and the potential of its pipeline of new projects.

Shuttering unprofitable hospitals offers a more tangible gain. Hospital real estate has seen valuation gains in the most recent years, according to real estate services group JLL. Market sales of freeholds will probably generate A$1.3bn more than their book value.

That means the group’s proposal for a sale and leaseback agreement of its attractive assets makes sense — cash flows to cover lease payments are less vulnerable to higher interest rates than valuations. It is still not enough to justify turning down a potential bidding war but it is a start.

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