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Merger could create world’s biggest HMO

. Jan 12, 2021
healthcare brazil m&a Brazil's healthcare landscape has been changing rapidly as of late. Photo: Govesp

The Brazilian healthcare landscape has been changing rapidly as of late, with many of the sector’s main players announcing multiple mergers and acquisitions to strengthen their position in the market. On January 8, however, the announcement of the potential consolidation of health-maintenance organizations Hapvida and Notre Dame is set to blow the rest out of the water. Combined, the resulting company would be the world’s largest vertically integrated HMO.

The news caused a market frenzy, with shares of Hapvida and Notre Dame soaring 23 and 30 percent, respectively.

Should the move go ahead, the resulting company would be valued at no less than BRL 120 billion (USD 21.8 billion) with an 18-percent market share and 12.4 million customers, between health and dental plans. However, this potential market concentration could raise eyebrows from antitrust regulators.</p> <p>Analysts from investment bank BTG Pactual highlight how well the two companies would complement one another. Hapvida is a leader in Northeast Brazil, while Notre Dame is stronger in the wealthier Southeast. Moreover, the two companies have been progressively gobbling up smaller players in a series of acquisitions deals to provide synergies for the future.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4932352"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>&#8220;Healthcare is a highly scalable business, so mergers and acquisitions usually lead to massive savings,&#8221; wrote BTG Pactual in a note to clients, in which it makes a &#8220;conservative prediction&#8221; that synergies could save Notre Dame around BRL 700 million — or 5 percent of its revenue.</p> <p>But while consolidation brings many benefits for companies, the same advantages are <a href="https://brazilian.report/business/2021/01/11/inflation-brazil-braced-for-a-second-wave-of-rising-prices/">not necessarily passed on to patients</a>. A 2018 analysis by researchers from the University of California, Berkeley showed that, in 25 U.S. metropolitan areas which saw multiple mergers at the beginning of the decade, these moves <a href="https://www.nytimes.com/2018/11/14/health/hospital-mergers-health-care-spending.html">lowered competition and pushed prices of examinations and procedures up</a> by between 11 and 54 percent.</p> <h2>A multi-step process</h2> <p>Regardless of the excitement around the potential consolidation, the path toward a deal remains long. Neither company&#8217;s board of directors have greenlit the move.&nbsp;</p> <p>According to securities filings, Hapvida shareholders would have a 53.1-percent stake of the joint venture, with Notre Dame&#8217;s owners keeping the remaining 46.9 percent. The new company would be listed in the B3 Novo Mercado&nbsp;— the highest level of governance of the São Paulo stock exchange — and its board would have nine seats, of which Hapvida would control the majority.</p> <p>Regardless, finance newspaper Valor reports that Notre Dame&#8217;s chief executive officer Irlau Machado would keep a leading role in the consolidated company.</p> <p>There are also doubts over whether antitrust authorities will give the deal their unrestricted blessing. Hapvida CEO Jorge Pinheiro said the companies are market leaders in different regions which, in his opinion, increases the chance of full approval.&nbsp;</p> <div class="flourish-embed flourish-map" data-src="visualisation/4932386"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>There are, however, notable overlaps in their operations, particularly in the southern state of Santa Catarina and Minas Gerais in the Southeast, where each spent BRL 1.6 billion in acquisition deals over the past year. Antitrust watchdogs Cade could decide to block previous merger deals in order to avoid market concentration.</p> <p>Investors with significant equity in both companies have <a href="https://conteudos.xpi.com.br/fundos-de-investimento/relatorios/fusao-hapvida-e-notredame-quais-os-fundos-que-possuem-os-papeis/">told</a> brokerage firms that low-cost health insurance plans could become ever cheaper with the consolidation — a powerful argument to gain regulatory approval.</p> <p>According to analysts from BTG Pactual, even healthcare competitors could have something to gain from the deal. The consolidation may tame the cut-throat race for new acquisitions, making new deals less hyperbolic. &#8220;Not by coincidence, the entire [healthcare] sector outperformed [the stock market] after the deal was announced,&#8221; they wrote.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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