Medibank Private Sale Would Boost Sector's Health, Says Mbf

Sydney Morning Herald

Tuesday December 27, 2005

Lisa Murray

ERIC DODD, MBF's outspoken chief executive, believes the health insurance industry is on the edge of dramatic change.

He is hoping the sale or float of Medibank Private will trigger a round of consolidation and force the sleepy mutuals that dominate the $10 billion sector to become more transparent and accountable.

"There needs to be more accountability and open scrutiny of organisations within this industry," Mr Dodd said in an interview with the Herald.

"Somebody wrote to me a few years ago and likened them [health funds] to tennis clubs, which is not far from the truth, quite frankly.

"If you wanted it to be, the CEO of a health fund could be the most fantastic job in the world. You could play golf five times a week."

Mr Dodd is hoping consolidation, led by Medibank Private, will change all of that by making health funds more focused on their business plans.

"Forty-two health funds in Australia makes no sense at all."

"And this business of going to the Government once a year and applying for a rate increase, which in many cases is just covering up the inefficiencies of last year, has a lot of people working on a one-year time horizon."

Medibank's scoping study, the handiwork of boutique investment bank Carnegie Wylie, was given to the Finance Minister, Nick Minchin, last week and will be considered over the first three months of the year.

Mr Dodd took holidays earlier this year to make sure he would be around for any decision on Medibank.

It is not surprising that the suggestion has generated so much interest. Medibank is the country's biggest health insurer, with almost one-third of the market, and if the Government opts for a trade sale, it is expected to fetch up to $1.5 billion.

Mr Dodd has been letting people know that MBF, for one, is interested. Other potential buyers include the Kerry Packer-backed Challenger Financial Services, UK group BUPA and South African group Discovery Holdings.

Competition concerns would rule out MBF acquiring all of Medibank, particularly its businesses in NSW and Queensland. But that has not stopped Mr Dodd from putting an informal proposal in front of the Government, with the help of its adviser ABN Amro.

While MBF has also sounded out potential partners, Mr Dodd said those discussions were on hold until the Government came out with its plan.

Even so, he said MBF was "in a good position to move quickly".

"We wouldn't have the financial capacity nor the desire nor the need to acquire the whole of Medibank Private. In Queensland, NSW and Tasmania, we couldn't acquire any of Medibank Private for competition reasons. But Victoria is clearly a gap in our geographic needs, we could do more in South Australia and we do very little in Western Australia.

"It's a very difficult industry to grown organically. It's virtually impossible."

Mr Dodd clearly relishes the challenges ahead.

As chief executive of NRMA Insurance between June 1998 and April 2001, he oversaw one of the market's most complicated demutualisations. In the end, he was ousted because of a blue with chairman Nick Whitlam, who also resigned.

With a smile, Mr Dodd says he gets on well with the board these days.

The combination of Mr Dodd as CEO and directors including former ASX boss Richard Humphry and former Perpetual chief Graham Bradley has fuelled speculation of an MBF issue and float.

Health insurance and financial services group Australian Unity came out last week and said that, following a review, it saw no compelling business reason to float. Mr Dodd says the same goes for MBF.

"Like Australian Unity, there's nothing driving us at the moment. The issue at NRMA was clearly one of governance in my view and that's why we pushed so hard at management level to get that. It was inevitable in terms of growth that we would have to move down that path anyway."

While MBF may not have the same governance concerns as NRMA, it is growing fast.

Its profits have more than doubled in the past two years. Revenues were tipping $2.3 billion in the last financial year, putting it in the top 100 biggest companies in the country. But, like other funds in the industry, its underwriting results have been boosted by strong investment markets.

Mr Dodd is more focused on growing the business rather than looking at a listing at this stage. He says it is important for health funds to have scale so that they are on an equal footing when negotiating with hospital groups.

If the Government decides to float Medibank rather than sell it, MBF will not look at taking a strategic stake but rather will move on to look at other opportunities.

One option is Australian Unity, which is big in Victoria where MBF is looking to grow.

"We've got a very good relationship with Australian Unity. Their model is a very similar model to ours. They've expanded into financial services. That could be a good marriage.

"There are other opportunities that exist and now, with the scoping study coming out, it's a good opportunity to provide more incentive for health funds to look at those opportunities."

© 2005 Sydney Morning Herald

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