Hapvida and Intermédica: what happened to the merger planned at R$100 billion?

when the Hapvida (HAPV3) debuted on the stock exchange in 2018, the stock quickly became one of the darlings of managers and analysts. The reason was in the business model: Hapvida is a vertical health operator with businesses throughout the production chain, from the health plan to its own network of assistance to beneficiaries. By offering “in-house” services, the company becomes more profitable and, in the eyes of investors, more attractive.

Hapvida showed strong growth driven by acquisitions that grew the business. Until January 2021, the date of the share’s historic high, the share recorded an advance of almost 220% compared to the IPO. Two months after this peak, the company’s merger with Intermédica was announced, a move that crowned the expansion process, creating a giant in the healthcare market.

The complementarity was clear. While Hapvida was strong in the Northeast, Intermédica was active in the Southeast. The combination of the two brought the possibility of creating a national health plan – the pinnacle of business in the health operator market.

Initial calculations indicated that the new business would be worth around R$ 100 billion, a figure that filled the eyes of investors. Just over a year later, the combined company is worth R$37 billion.

Challenge in synergies

In a merger as big as Hapvida and Intermédica, one of the biggest expectations of the market is the so-called “cost synergy”. The merger of companies allows for cuts in duplicated areas, such as the investor relations area or even the administration itself. But that’s not what happened in this case — at least not in the way the market expected.

“The first benefit of a merger of this size is the reduction of personnel, but the company has kept much of the structure of the two companies. This entails expenses with salary, team, retention. It impacts the cost synergy, so much so that the results since the merger have been greatly harmed”, says a manager who prefers not to be identified.

The company presented Intermédica’s numbers only for the months of February and March, based on the integration of the companies. The lack of data for January jeopardized the basis of comparison, increasing distrust with the potential gains of the business combination.

difficult macro scenario

With cost synergy jeopardized, the responsibility for leveraging the merger rests with the potential revenue gains. And it, in turn, has been overturned by the macroeconomic scenario that has affected not only Hapvida, but the entire health sector.

The first signs of the setback for the sector, even before the announcement of the union, appeared in 2020, a year of very low medical expenses (loss ratio) in the industry. With isolation, customers preferred to postpone elective procedures, such as non-urgent surgeries and exams, which reduced operators’ costs. The following year, however, the pent-up demand joined the rise in hospitalizations caused by Covid and made the loss ratio of health plans skyrocket.

Private sector medical expenses rose 24% in 2021 when compared to the previous year, according to calculations by the National Supplementary Health Agency (ANS). Costs were still 19% above pre-pandemic 2019 levels.

And for this year, the obstacle still remains. Hapvida’s loss ratio reached 72.9% in the first quarter of 2022, an increase of 11.8 points year-on-year.

The pandemic was also responsible for the breakdown in the medical supply chain, which raised prices and affected the industry. The general balance of the crisis is a movement of high inflation around the world, which makes products more expensive, raises interest rates and takes away the population’s purchasing power.

“Hapvida’s business depends on families hiring the service, so it is completely associated with the macroeconomic moment. The situation is even more complicated considering that most of the company’s beneficiaries are low-income, the population most affected by the deterioration of the economy”, says the duo of analysts in the health sector at Guide Investimentos, Luis Assis and Guilherme Viana.

Organic growth is key

Another challenge for Hapvida is the acquisition and maintenance of customers. In the first three months of the year, the company lost 64 thousand lives, equivalent to 0.7% of the base.

“Both Hapvida and Intermédica have grown over the years driven by acquisitions. Now, however, with no other major player to acquire, that movement is over. And it makes the company much more dependent on organic growth”, argue Lucas Ribeiro, head of equity at Kinitro, and Marcelo Ornelas, equity manager at the same company.

The duo believes that the new company is still in the process of settling the operations of the last purchases. “Hapvida has grown below the industry organically because it is still organizing. It is a process that does not allow for growth in the short and medium term. In addition, growing organically is much more difficult”, they defend.

What to expect from Hapvida (HAPV3) going forward?

If after the storm comes the calm, the market expects the challenging moment for Hapvida to end with the recovery of Hapvida’s shares and business model in the long term. “We invested in the IPO and maintained a position in Hapvida until the merger. We sold it because we thought the stock went up too much at the time and we haven’t invested since then. But the thesis is positive and remains intact”, argues a manager who preferred not to be identified.

The company’s shares are traded at around BRL 5.20, a value 70% lower than the maximum reached at around BRL 17.

Source: Exam