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Medibank float a good bet as consolidation looms

Posted by on 29/06/2018

Illustration: michaelmucci南京夜网It won’t be cheap, and it’s unlikely to knock the lights out but the float of Medibank should do well in the longer term. Barring a market meltdown, sheer demand will see to that; demand likely to surpass the supply of stock on issue by a factor of 10.

The Medibank executives and their brokers will hardly be yelling it from the rooftops but as they showcase their wares to institutional investors, their message will be industry consolidation.

The success of this company lies in the transfer of value from policyholders to shareholders. Already, Medibank and its acquisitive rival Bupa, account for 60 per cent of the market in health insurance. This is a sector that has gone from zero non-profit players to a 70 per cent majority. Between 1995 and 2011, the number of funds shrank from 49 to 34.

They will continue to gobble each other up and, when they are in an unassailable position of duopoly, premiums will begin to firm. The game will be all about executives and shareholders now, not those irritating sick people.

It is this looming consolidation that makes the float of Medibank an attractive investment proposition. It justifies the ritzy float valuation – P/E ratio of 16.5 to 21.3 times – and assures an aftermarket in the stock from institutions.

If there were any doubt that the remaining non-profit rivals – those bound to act in the interests of their policyholders – can resist the temptation to be bought by Medibank or Bupa, look no further than the pay of managing director George Savvides.

Overnight on November 25, his pay will suddenly triple to $4 million. Those in charge of the remaining non-profit providers must be licking their lips.

If you go to the Medibank prospectus – that’s that fat bit in front of the application form – you will find the usual orgy of fees for a government asset sale. The lawyers’ clip stands out. For taking precisely zero risk, Freehills gets $3 million for advising government and Mallesons takes home $4 million for advice to Medibank.

They have done a terrific job of making it impenetrable. If you happen upon the “Material Contracts” section – that’s the fine print where you tend to find the stuff that matters – you will see mention of the Australia Defence Force contract.

What you won’t find though is any mention of the single-most important thing about it, what it is worth, its materiality. This was a four-year deal awarded in 2012 that is presumably very “material” to the Medibank statutory disclosures. Were it not “material”, it would not appear in the “Material Contracts” section.

Anyway, if you have a lot of time on your hands you might, at a stretch, find a bit more information about the ADF contract in the “Complimentary Services” section of the document.

This section involves stuff like Medibank’s insurance for pets. Did you know you might be entitled to a 10 per cent rebate on the cover for your pet galah if you are a member of Medibank Private?

Medibank’s “Gold Paw Cover” even includes obedience training, desexing and a special flea, tick and worm control package. Truly gold. But it doesn’t explain why healthcare insurance for the nation’s defence personnel has been lumped in with that of the animal kingdom.

One can only assume it has been materially buried. Medicare revenues were up 8.8 per cent but Complimentary Services shot up 41.5 per cent to $211 million: “the latter reflecting a full-year of ADF Health Services Contract”.

AGL’s fee spree

When it comes to spectacular fees though, AGL has trumped Medibank hands down this week.

Deep into annual meeting season as we now are, AGL shareholders were kept from the hors-d’oeuvres table for a unacceptably long time on Thursday as coal seam gas opponents took chairman Jerry Maycock to task over the Gloucester project. He earned a well-deserved grilling over the group’s failure to properly disclose political donations.

Yet it was $156 million in fees on the company’s $1.5 billion acquisition of Macquarie Generation that sailed under the radar. Transaction costs of 10 per cent must surely keep the wolf from a merchant banker’s door.

This merchant banker’s welfare policy complements AGL’s robust corporate welfare strategy. To wit, first buy power stations from the government at low prices due to oversupply of generation capacity in the National Electricity Market.

Secondly, get in-house economists to argue that the “design” of the market should be changed from the present oligopoly where a few generators supply the market, to a “capacity” market where generators are paid for inefficient high-cost capacity. Yes, this is the latest scheme.

Thirdly, increase consumer bills to pay for the new “design” of the market. This will come, should AGL get its way.

The chutzpah is breathtaking. Not only did this and other big polluters pick up hundreds of millions in compensation from Labor for the introduction of the carbon tax, but thanks to the change in government, the carbon tax is gone and they apparently kept the cash.

Now, having acquired inefficient assets, they are pushing for compensation for their inefficiency.

This attempt to remove market signals is corporate socialism incarnate: privatise the profits, socialise the losses. AGL paid a cheap price for the generating capacity it bought from the government. The market is still in decline as it was when they bought the generators cheaply and now they want to change the market “design” to increase their profits. No wonder power bills are off the scale.

This story Administrator ready to work first appeared on Nanjing Night Net.

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