Aveo Group [ASX:AOG] is a market leader in the Australian retirement community. Aveo now operates 95 retirement communities, running some 17,000 homes. They have a clear lead on their competitors. Yet that doesn’t mean Aveo plans to stop expanding.
Today, Aveo confirmed its commitment to acquire Freedom Aged Care. Freedom operates 15 aged care communities throughout four Australian states. They have 533 more units in the pipeline, which will add to Aveo’s existing projects. Aveo offered $215.5 million to take over Freedom, not including additional costs.
Aveo shot up more than 8% in early morning trade today. Shares hit a high of $3.22, giving Aveo a 1.59% gain for the year.
Source: Google Finance
Acquiring Freedom was obviously the right decision to make. One of the attractions for the takeover was Freedom’s private care model. Aveo can now adopt this strategy for its own operations. ‘We will progressively roll that model out to certain parts of our business,’ Aveo CEO Geoff Grady said.
Why the deal was worth millions
Aveo funded the deal with:
- $83.5 million in scrip plus a $10 million cash payment to vendors;
- $88 million in debt owed to lenders;
- Deferred payments of $34 million in present value terms over a four year period.
So what does all this mean?
First, the scrip offer. This just means that a takeover will be funded partly or wholly by shares. Freedom shareholders will be offered Aveo shares as compensation.
The second part consists of debt owed to lenders. Aveo will use borrowed money to partly pay for the takeover. This will supplement the existing script offer.
The third item is deferred payments. Along will borrowing extra funds from lenders, Aveo will delay repayments. Meaning they will take funds used to pay debt to fund the acquisition.
Now, if a company went to all this trouble you would expect the takeover to value to shareholders. And it has; or, at least, it’s expected to. The acquisition will boost Aveo’s return on retirement assets to 8% by FY18. And, by FY17, the acquisition will gradually increase earnings.
The acquisition now put Aveo’s on track to meeting its FY16 earning guidance. Earnings are already up around 89% from prior corresponding period. And things are only expected to get better. It’s a huge turnaround. In under a year, Aveo will be able to make their investment profitable.
‘We have strong momentum across the group and total sales volumes in the second half are expected to exceed the first half,’ Mr Grady said. Aveo is strictly playing the retirement market. But selling existing real estate is also adding to Aveo’s earnings.
The immediate future is looking bright for Aveo. A long term investment in Aveo also looks promising. With Australia’s population getting older, it’s likely to expand Aveo’s reach.
The graph below shows various age groups and their expected growth within Australia.
Source: Demographics Treasury Australia
Straight away it’s clear that Australia’s population is expected to age over the next few decades. The 85+ age group is a clear stand out, increasing more than all other age groups combined. Whether this ageing population will find themselves in an aged care home remains uncertain. Medicine and technology is helping the elderly live highly active lives at home.
However, the numbers are promising. Aveo might not count every citizen over 60 as a client. But it does increase their potential market base. There is the prospect for Aveo to capture more market share within Australia in the near, and long term, future.
Junior Analyst, Money Morning
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