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After falling almost 5% in a day, Primary Health Properties (LSE:PHP) has slipped back to 99p. But the FTSE 250 real estate investment trust (REIT) has had some potentially big news.
It looks as though the firm has managed to hijack KKR’s takeover of fellow healthcare REIT Assura (LSE:AGR). And the result could be a very interesting stock for passive income investors.
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M&A activity
There has been a lot of interest in UK REITs over the last few months. As well as Assura, Care REIT, Warehouse REIT, and Urban Logistics REIT have all been attracting attention.
After a short bidding war, Assura announced it intended to accept a best-and-last offer of £1.7bn from a consortium led by US investment firm KKR. But it’s now switched courses.
Officially, the preferred offer from Primary Health Properties values the company at £1.8bn. There are, however, a couple of things to keep an eye on.
The deal involves merging the two companies to create a much bigger healthcare REIT. And Assura shareholders are set to receive the following (for each share they currently own):
- 12.5p in cash
- A 0.84p special dividend
- 0.3865 shares in the combined company
The firm currently has a market value of £1.62bn – around 10% below the proposed takeover price. But the final value of the deal depends on what happens to the Primary Health Properties share price.
With that in mind, I’m not looking for a quick win based on the deal going through. But I am interested in the combined company as a potential long-term passive income opportunity.
Passive income
In their current forms, Assura and Primary Health Properties are very similar businesses. Both make money by owning and leasing portfolios of healthcare properties – notably GP surgeries.
There’s a slight difference in terms of the balance of state (mostly NHS) and private tenants. But combining the two clearly offers some benefits of scale for shareholders.
The similarities between the two businesses mean they also have similar risk profiles. Both use their reliable income stream to operate with unusually high debt levels. Assura and Primary Health Properties both have net debt levels roughly equal to their entire market value. That’s something investors need to factor into their calculations.
Both stocks currently have dividend yields of around 7%. So even if the combined company has to issue shares to pay off some of its debt, investors might still hope for a good return.
An aging population and the UK government’s desire to use private healthcare to try and reduce NHS waiting times should both be benefits. As a result, I think this is an interesting opportunity.
Which stock to buy?
I’ve owned shares in both Primary Health Properties and Assura in the past, but I’ve since sold both. Looking back, I think that was probably a mistake. The merger of the two companies could well be my chance to get back in. But I have a clear preference for which stock I prefer at this stage.
There’s still a risk the deal doesn’t go through. And in that situation, I expect both share prices to go back to where they were before the latest news. That means up (slightly) for Primary Health Properties and down (slightly) for Assura. So to cover that possibility, I think I prefer the former.
