Medibank Private sale: Investors eager for $4b IPO

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March 26, 2014 – 7:51PM

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Generic medical, waiting room, medibank private, doctor. Tuesday 5 September 2006 AFR photo Louie Douvis AFR FIRST USE ONLY SPECIALX 55746

Analysts say Medibank Private could be worth $4 billion when floated on the sharemarket. Photo: Louie Douvis

Fund managers are keenly awaiting the $4 billion initial public offering (IPO) of the country’s largest private health insurer Medibank Private, saying government vendors often leave room for earnings growth because the companies are forced to become more efficient operators when they are listed.

On Wednesday Finance Minister Mathias Cormann announced the Coalition would push ahead with plans to float the government-owned insurer in 2014-15.

The float could be popular with mum and dad investors who are familiar with the well-known Medibank brand and who remember the previous successful sales of government assets like Telstra and CSL.

Nomura analyst Toby Langley said Medibank would likely be worth about $4 billion, based on the valuation of its competitors.

Medibank controls about 30 per cent of the private health insurance market.

But Mr Cormann said Medibank policy holders would not receive shares in the float.

When customers sign up “they don’t buy a share, they buy health insurance,” he told a press conference.

Medibank’s sharemarket entry would be the biggest float since the Queensland government’s $4.6 billion listing of rail business QR National in November 2010.

The company, now called Aurizon, has doubled in value since it floated.

Investors Mutual equities analyst Daniel Moore said government-owned businesses often perform well as listed companies because executives are given new incentives that encourage them to more aggressively pursue profit.

“Generally if executives have better opportunities to earn bonuses and [gain] value from options through executive options schemes they tend to work a bit harder and are more driven to deliver profit outcomes year to year,” he said.

Nomura’s Mr Langley said there was room for Medibank to sharpen up its act, which could be attractive for investors hoping for a future earnings boost. He said the insurer was inefficient for its size and has the potential to deliver earnings growth simply by cutting management and administrative costs.

Mr Langley said Medibank’s management expense ratio of 9.2 per cent, which measures the cost of administrating policies against revenue, could be much lower than the industry average of 8.8 per cent. “They should be better than most and when you compare them to some of their peers they just look a long way behind,” he said.

Philo Capital fund manager Hugh Dive agreed that government businesses were often priced to leave room for share price growth after an IPO.

Mr Dive said the float was likely to get a decent amount of interest from retail investors, so it made no sense for the government to price Medibank in a way that would financially hurt those shareholders – who are also voters. “Unlike in private equity there are very little incentives for managers in Medibank Private to cut corners to dress it up for the sale,” he said. “It’s likely to have a few less nasty surprises.”