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Two giants of Brazilian healthcare, listed HMOs Hapvida Participacoes e Investimentos SA and Grupo Notre Dame Intermedica Participacoes (GNDI), have received approval to merge from the country’s antitrust authority CADE. The merger will create the country’s biggest provider of health insurance policies, with around a 20% share of the for-profit market by number of users, and a 10% share of revenue.
Shares in both companies rose on Thursday morning last week, after the announcement by Hapvida that the Brazilian authorities had approved the merger with no restrictions. Shares in GNDI leapt 7.6%, to 68.84 reais (€10.89), and in Hapvida they were up by 6.3%, to 12.07 reais (€1.91). But though this is clearly a positive move for both companies, shares in both were down 12% since early December.
A source in Brazil tells HBI the new group is likely to be able to make significant savings on medical supplies, equipment capex and general and administrative expenses, and looks set to dominate a fragile market where the public system is continuing to buckle under the additional pressures of COVID, but it will not be all plain sailing.
The source explains: “The stock prices took a hit before the merger, and one explanation is this is due to a new COVID/influenza surge. The approval of the merger was the easy part, now comes the integration and it will not be easy; the assets they own and the regions they operate in are very different. Hapvida are in the north-east of the country and GNDI in the south. In my opinion, the synergies have been overestimated by the market, as usual. Should it try, the new group will not be able to force northeast costs and a lower service standards to other regions of Brazil. And to make matters a bit more complicated, the Hapivida family still controls the company and may see it as a family business, so they may have a way to go on governance as well.
“Hapvida knows how to operate well in the poorer, northeast regions of Brazil, where in my experience the demands for quality service are lower because the only alternative is the public system. But it is already suffering from demands for better services by patients and physicians in some cities, and they will certainly have higher costs in several states even after the pandemics. And if you keep pressuring physician groups too much to cut costs, they can stop working for you.”
The merger between the rival insurers/hospital operators will see GNDI shares incorporated into Hapvida’s shares. Intermedica shareholders will receive up to R$4bn ($720m) in and the balance in shares. Hapvida shareholders will hold a 53.6% equity stake in the new business, and GNDI shareholders will hold a 46.4% stake. The combined company will have over eight million clients and own 70 hospitals across the country.
The source predicts: “You can’t overestimate the impact of this merger on Brazilian healthcare. This will have a country-wide impact. It’s going to be hard for anyone to compete with this centralised HMO. All the ‘big’ players other than these two, they all have a 10bn reais (€1.58bn) valuation, and have suddenly become a lot smaller compared to this giant, which is ten times bigger. They risk becoming M&A targets themselves.”
While in other countries the sheer scale of the combined group might have called its approval into question, HBI understands that the public system in Brazil is under so much pressure that any large business available to help relieve the burden – even a potentially monopolistic one – is not going to be scrutinised or criticised too heavily.