MERGERS AND ACQUISITION

EMBA 2018
INDIVIDUAL ASSIGNMENT

Analysis of the acquisition of a private healthcare

facility

PREPARED BY: SAADIA BEN AMOR

Deal presentation

A renowned private Group (who already owned 4 clinics in Tunisia) proceeded in end of 2017 to the
acquisition of a majority share in the capital of a Healthcare facility In Tunisia. For confidentiality
reasons, I can’t reveal the name of the facility healthcare as one of the doctors who invested in it.

The major events and timelines relating to the transaction are summarised as follows:

1. The healthcare facility was owned by a private investor (the project developer) at 23% and by a
private equity fund at 26%. The remaining capital was held by individuals (mainly doctors).

2. At the beginning of the year 2017, the private equity fund, coming to maturity, engaged into an
exit process from the healthcare facility and started a commercialisation process of its
participation. At the same time, the project developer, for age reasons, also showed his
intention to exit.

3. The fund, in collaboration with the project developer, engaged into a process of preparation of
the transaction, by building a Business Plan over a 5 years period, preparing a teaser then an
Information Memorandum and proceeding with the Valuation of the health care facility.

4. Various investors have been approached, and finally the private Group, signed a Letter of Intent,
including a non-binding offer and an exclusivity period of 3 months, at the end of October 2018.

5. The private Group launched various Due Diligence missions: Financial Due Diligence, Tax Due
Diligence, Social Due Diligence, Legal Due Diligence; in addition to the valuation of the entity.

6. A Shares Purchase Agreement was also prepared and commented by both parties and the
singing of the transaction occurred on December 2017. The transaction was then finalised and
the Private Group took hold of a 49% on the healthcare facility at that date.

Strategic reasons for the acquisition:

The health sector in Tunisia is mainly composed of private clinics. The composition of the health units in
Tunisia as retrieved from http://www.ins.nat.tn (for the year 2016) is presented on the table below:

Category Number
Private clinics 91
General public hospitals 14
Specialized public 21
hospitals
Regional hospitals 32
Besides the important role played by the private healthcare units at the national level, Tunisia has also
become a medical destination for tourists. On 2016, according to Taoufik Haj Hissine, Director-general of
the new Clinique Pasteur in Tunis and as retrieved from
https://oxfordbusinessgroup.com/overview/annual-check-solid-foundation-sector-ready-overhaul
“Foreigners represent 30% of our customer base, half of whom are Libyan, followed by Algerians, sub-
Saharan Africans and Europeans.

The private group, who acquired the private facility health care, already managed 4 clinics in Tunisia. This
acquisition would represent a horizontal acquisition as they are operating in the same market. It will
allow the private group to benefit from economies of scale, experience effects. Its market power would
increase as well as it would reduce its capital costs.

Post-acquisition and integration period

Following the signing of the Shares Purchase Agreement, transition period procedures have been set
between the parties in order to:

- Ensure the continuity of the healthcare facility operations.

- Avoid major events and transactions that could impact the value of the shares, like for instance
substantial increases in expenses (mainly personnel and fees), significant abnormal payments
and investments, etc.

The Shares Purchase Agreement also included a set of Condition Precedents, like for instance the
authorisation of the Central Bank of Tunisia for the achievement of the transaction as well as the
registration before the BVMT (the Tunisian stock authority) of the shares transfer. The Shares Purchase
Agreement included also a set of guaranties for contingent liabilities linked to tax and social risks as well
as to a significant litigation between the Health care facility and a third party on a Land.

Following the closing of the transaction, the private investor engaged into the following:

• The hiring of consultants to proceed with the translation of the health care facility accounts from
Tunisian GAAP to IFRS.
• The hiring of an external firm to conduct a mission of Internal Audit (Internal controls review of
the healthcare facility).
• The conduct, with the assistance of an accounting firm (the same that conducted the Due
Diligence exercises) to actualise the Net Debt and the Balance Sheet balances at the closing date
and to assist into stock taking of assets and inventory.
• The review of the organisation in place at the level of the healthcare facility and the
identification of the synergies to be implemented and the restructuring programs to be
launched. As the private Group operates in the healthcare sector in Tunisia and owns already 4
private clinics.
• The installation of a cost accounting that is already working and efficient at the other clinics, the
enforcement of reporting as the health care facility used only to produce annual financials
Main issues faced on the post-acquisition period

Issues encountered post-acquisition relate mainly to:

1. Culture clash:

When trying to centralise various functions of the health care at the level of the private group as the
ultimate parent in order to achieve economies thanks to this reorganisation, the following challenges
and difficulties have been met by the Private Group management:

• The healthcare facility used to be managed by the project developer, who centralised all the
decisions and managed his teams with authority. The Project developer used to be the CEO of
the health care facility and the culture he set did not allow employees to be independent in the
decision making or to be proactive. The private group, already operating its 4 clinics since years,
set procedures and internal controls at the level of these (Reporting system, Management
accounting, objectives incentives…) in order to allow to each Manager/executive to be
autonomous and favoured collaborative management. The change in the management style led
to significant difficulties for employees to adapt and also led to important departures (by layoffs
or voluntary).

• The alignment of the strategy of the Health care facility to that of the remaining entities of the
Group was harder than expected.

2. Unexpected expenses and bad discoveries

• The private group engaged in additional expenses in order to review and renegotiate the major
hiring of consultants to precede with the translation of the health care facility accounts from
Tunisian GAAP to IFRS.

• The discovery, post-acquisition of various contingent liabilities and issues that would have
changed the value of the Health care facility. A part of the contingencies is covered in the
warranty section of the Stock Purchase Agreement, and the seller with whom an escrow amount
was initially agreed and blocked for a period of one year after the closing will be damaging the
buyer (through withholding) of the relating amounts. Nevertheless, the Buyer had to renegotiate
with the sellers for the additional other contingencies, and only a partial agreement has been
reached thereon.

• Absence of medical equipment maintenance contracts that enable recurrent and essential
maintenance of the major Equipment of the clinic (like for instance the RMI and the Scanner).
The buyer had to implement the said contracts as their absence gives rise to operational risks.
The recurring expenses relating to the said contract amounted to TND1m, yearly. These have not
been taken into consideration in the assessment of the recurring performances of the Clinic on
the basis of which the valuation has been undertaken.
 • The existence of various agreements with clients presenting very low tariffs and prices. The
buyer had to renegotiate the said contracts and to terminate those on which an agreement of
tariffs increase was not obtained.

• The existence of significant Accounts Receivables on Libyan organisations, of TND 20million, that
are largely overdue (aging of more than 3 years) and for which no provision (reserve) has been
booked in the accounts.

• The existence of litigation with the initial land owner on which the clinic was built. A judgment
against the clinic was issued by the Tunisian court. The buyer engaged into an amicable
discussion with the suer and reached an agreement as to the payment of a penalty that is largely
lower than the amount that was decided by the court.

Overall evaluation of the deal

Even though, the different post-acquisition bad discoveries had bad impact on the net value of the
acquired health care unit but I still think, this acquisition was a successful one.

The main arguments for my opinion are the following:

- As for the Libyan unrecovered debts, the health care unit acquired is not the only clinic suffering
from this problem. Most Tunisian clinics, have accumulated since 2011, unpaid debts with Libyan
customers. This problem is being treated at a national level and the Tunisian officials are
negotiating with their Libyan counterparts in order to recover the clinic’s debts. As a solution to
this problem, the private group would have to provision the debts. It would reduce its net profit
for the first year but as soon as the debts would be paid, the equilibrium would be reached
again.
- As for the litigation with the land owner, I would have definitely considered the deal as
unsuccessful. But the worst scenario has been avoided and fortunately, the private group can
move forward. The challenge is to reduce as much as possible the penalty and try to recover it
from the buyer.
- The renegotiation of the past agreements with clients who had preferential tariffs is a necessary
step in order to align the new health care unit with its corporate strategy. Some of the health
care customers would probably refuse to see their tariffs increase but overall, the global
customer’s portfolio should be enlarged. The challenge is to audit carefully the previous tariffs
and fees and estimate the power of the different customers in order to avoid a negative impact
on revenues.
References

https://latunisiemedicale.com/article-medicale-tunisie_3201_fr

https://oxfordbusinessgroup.com/overview/annual-check-solid-foundation-sector-ready-overhaul

http://www.webdo.tn/2017/06/05/retard-paiement-dettes-libyens-aupres-cliniques-tunisiennes/

https://www.tunisienumerique.com/tunisie-88-millions-de-dinars-de-dettes-des-libyens-aupres-des-
cliniques/