South African companies are muscling their way into the UK private hospital market, underscored by Mediclinic's R8.6-billion purchase of 29% of Britain's second-largest private-hospital owner, Spire Healthcare. The deal means Mediclinic and Netcare, which bought into GHG, the UK's largest group, in 2006, have valuable stakes in the two largest private-hospital operators in the UK.It is a big deal for Mediclinic, equal to 10% of its entire market capitalisation, and it impressed investors, who have not had it easy in recent months. After the deal was announced on Monday, the stock leapt 5.6% to an on-day high of R103.50. On Wednesday, it reached as high as R105.69 before retreating to R102.81 at the close on Friday.story_article_left1Asset management firm Vestact said Mediclinic was evolving faster than anticipated."We certainly view this as a positive, remembering that the share price performance has been awful since it peaked at R133 a couple of months ago," it said. At a share price of about R100, Vestact recommends that investors buy the stock.More importantly, Momentum Wealth portfolio manager Wayne McCurrie said, the Spire transaction confirmed the trend of South African healthcare providers looking overseas for growth .Danie Meintjes, the CEO of Mediclinic, affirmed that overseas growth ambitions figured heavily in its thinking."It's easier to operate hospitals closer to home, but the reality is that with the big three groups, which have about 75% to 80% of the market, the chance for exponential growth for those is zero."If you have aspirations to grow, you can diversify into related services, which we don't like. Geographical diversification is the only other option. There's no reason you can't succeed if you replicate what we've learnt over the years," he said.Mediclinic has already successfully expanded into Dubai and Switzerland . Following the UK deal, 70% of its revenue will come from overseas.Said Meintjes: "We're not desperate to grow. We don't have a strategic plan that says we must grow assets by a certain amount by a certain time. There are fundamental reasons why we're going abroad - but we're still investing heavily in South Africa."However, Spire, which has 39 hospitals and 13 clinics in England, Wales and Scotland, will be a big group to digest.Meintjes said the UK market had great growth potential.At the moment, the private sector delivers only 6% of healthcare services in the UK. While the population is growing at just under 1% a year, the country has an ageing population.About 16% of UK citizens can expect to live beyond the age of 100, and 26% of those under the age of 16 are expected to pass that mark.Furthermore, the state's struggling National Health System is "subcontracting" more and more patients to private healthcare providers to reduce waiting times.Said Meintjes: "The NHS is under pressure and we believe the private sector is a worthwhile player to . offer services to that growing demand."The £106-billion (about R2-trillion) a year spent on healthcare in the UK is forecast to rise to £150-billion to £160-billion."Even if you halve that (growth), it's great potential," Meintjes said.block_quotes_start I would also caution that governments globally are 'slow payers' and hence the investment in working capital is often larger than planned block_quotes_endThe deal is a complicated one, because Mediclinic does not have the balance sheet to fund the purchase. So Remgro, which owns 41.3% of Mediclinic, will buy the stake in Spire Healthcare, and Mediclinic will then buy it from Remgro.To make this payment, Mediclinic will issue 111 million new shares at R90 each to raise R10-billion. The difference between this amount and the R8.6-billion purchase price - about R1.4-billion - will be used for transaction costs and growth.But the jury is still out on whether this is a savvy deal.Reuben Beelders, a portfolio manager at Gryphon Asset Management, said the impact of currency swings made the deal difficult to assess. In the new millennium, a number of South African companies went offshore when the rand was weak - but when the currency strengthened, their return on investment looked poor, he said."Currency can have a big impact on the ultimate return on investment. However, I think from a strategic perspective it's a good deal."Beelders said the 29% stake gave Mediclinic a big enough shareholding to get a "seat at the table" and learn about the UK market. And, should the price fall or Mediclinic decide that long-term opportunities were good, it could take over the entire business.The NHS's struggle to take care of Britons was also a potential source of business, Beelders said.story_article_right2"It has taken a lot longer for this to be reflected on the revenue line of Netcare, for example. I would also caution that governments globally are 'slow payers' and hence the investment in working capital is often larger than planned."The Spire deal is unlikely to be the last offshore investment by local healthcare companies.There is already speculation that Netcare is about to take a stake in India's Care Hospitals.Indian business information website VVCircle said Netcare and private equity firm Baring Private Equity Asia were frontrunners to buy a controlling stake in Care. The group has 17 hospitals in nine Indian cities, according to corporate finance magazine DealMakers.In February, the Indian press reported that Netcare was working with Reliance Foundation to buy a majority stake in Seven Hills Healthcare. Last year, there wasspeculation that Netcare was in discussion with private equity investors to buy a majority stake in the subcontinent's Vasan Healthcare.But Netcare has struggled to report significant earnings in the UK. Beelders said the group took a highly leveraged approach, trying to finance the operation largely with debt."There have been huge changes in debt and property markets. There may be a bit of frustration, but I think it's priced in," he said.South Africa's Life Healthcare has already moved into India, where it has a stake in Max Healthcare, and Poland...