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DANIE Meintjes is CEO of Mediclinic.

BUSINESS DAY TV: Hospital group Mediclinic is getting a toehold in the UK private healthcare market through a deal that involves itself, its major shareholder Remgro and UK-listed group Spire Healthcare in which it will end up with a 29.9% share. Joining me now on the line is Danie Meintjes, CEO of Mediclinic.

Danie, before we get into the rationale of the deal, can you explain how it is that the deal has been structured, that Remgro Jersey ends up buying the stake and then effectively selling it to Mediclinic…why have you organised it this way?

DANIE MEINTJES: Yes, to make it less complicated simply for the execution, it was a private equity company that wanted to sell. We started to negotiate with them via Remgro. We knew that while we jumped through all the hoops to get all the approvals in line, to get regulatory approvals from the Reserve Bank, etcetera would just simply take too long. Remgro has got a strong balance sheet, they had the excess cash, and they could get money from the banks quickly, so it was purely just to facilitate the timeline of the execution.

BDTV: Okay, but having said all that, if you calculate, and I don’t know if I’ve miscalculated, but what Remgro is going to pay for that 29.9% stake and what Mediclinic will pay Remgro, there seems to be that Remgro is taking some sort of cut. It’s not huge but it is a couple of tens of millions of pounds…is that the case that Remgro actually ends up taking a fee from this?

DM: They will and its more, it’s a facilitation fee for the execution using their balance sheet, putting it together, it’s very fair and even lower than market-related fee, yes. But they will definitely get paid for using their balance sheet and putting it all together.

BDTV: So you think it’s fair that they do take a cut even though they are a big shareholder of yours?

DM: I don’t think you must frame it as taking a cut, they get remunerated for executing this and compared to market fees, and it’s a very fair fee.

BDTV: All right. So before we get to the rationale, Mediclinic is going to initiate a rights offer…you’re going to raise R10bn…R8.6bn of which will go towards Remgro for paying for the stake, and then you’re left with R1.4bn for general purposes. Are you quite confident that your shareholders, aside from Remgro, will back the rights offer?

DM: Yes, Remgro has already committed to back it and they will follow their rights for their 41.3% of the shares and the share price was coming at a discount as you know, R90…so I’ve got no reason to believe that shareholders will not follow their rights. But Remgro is fully underwriting the rest of the offer, so if anybody, any shareholder doesn’t take it up then Remgro will take it up.

BDTV: Okay. Why do you want Spire Healthcare?

DM: It’s a good company. We’ve said previously we like healthcare, we like our pure play, we do not like to diversify, we like the fit of this. We’ve been in SA for a long time, we are one of the big three players here, we know that exponential growth is not possible, we would like to spread the eggs in our basket and diversify geographically in a market with strong drivers for healthcare, the need for healthcare and a strong currency, and it makes sense for us, so we are very pleased with this.

BDTV: Because what is interesting is that you say in your Sens statement, or Remgro does, that you have no intention to take your stake above 29.9% but what is the benefit to Remgro of having a minority stake in the company, or Mediclinic at least?

DM: First of all they hold the regulatory specifications in London, on the London Stock Exchange. If you make an offer of 30% or higher, then it is seen as an offer to minorities and to do that, if you do not have all the money available specifically to buy the whole company which is a huge transaction, a lot of money, and we are quite happy with a strategic stake of 29.9%. We believe it will give us a footprint in the UK, understanding that market. So we’re comfortable and we said very clearly that we have no intention for now to increase the offer to the other minorities.

BDTV: Would you at some stage though, so having taken a chunky stake in it, if in the future you get the capital available to buy out the minorities in Spire, would you want to?

DM: That is not a consideration at this stage but I cannot speculate going forward forever, but at this stage, our answer is no.

BDTV: I was looking at some of Spire’s details and it came together, it seems to me, in a 2007 transaction with Bupa Healthcare. It had a lot of debt on its books and that seems to have been whittled down to about £400m-odd, but one of the mechanisms by which Spire managed to whittle down its debt was by selling its hospitals and then leasing them back, so how many of its 39 hospitals and 13 clinics does it actually own?

DM: Yes, to answer your question, before they went to the IPO they did lower their debt by selling off some of their property and at this stage they hold around 50% of the entities that they run, they hold also a property component, about 50% was sold off, but with long-term lease agreement at favourable terms and that is the position...

BDTV: So you’re not worried because there’s some concern that its rentals might increase, and that’s something that they then have no control over, not entirely owning those properties?

DM: If you have a long-term lease agreement with a lock-in, the range of your rent increase, then you have some control. So they’ve got that inflation and we’re comfortable with those figures.

BDTV: Okay, just lastly, the UK is an economy that’s clearly improving, it’s an interesting space because it’s not a massive growth area, but do you feel that it’s still a strong economy in which you would want to have a stake as you obviously have done through your deal with Spire?

DM: Yes definitely. The UK market…the population is still growing, they’re growing at around 0.8% or just under 1%, but a further driver is the ageing population…if you look at the age … If you look at operations possible today on old people that were not possible 10 years ago, technology plus the ageing population is the right sort of move in the market to drive the needs.

Further, if you take into account that the private sector accounts for a really small percentage of the healthcare spend in the UK, round 5%-6%. The NHS is still by far the dominant player and with a lack of funds and with growing demand we are at ease that there will be a bigger role for the private sector going forward.