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SANLAM has acquired a 28.7% stake in AfroCentric Health, a wholly owned subsidiary of the listed AfroCentric Investment Corp. This is a major achievement for the insurer, which has battled to play a notable role in the health administration sector since its return seven years ago.

Johan van ZylSanlam exited the health administration and managed care industry in 2001, but made a comeback with the launch of Sanlam Healthcare Management in 2007.

 The transaction will result in Sanlam holding an effective 27% in Medscheme, whose clients include Bonitas, Fedhealth and the Government Employees Medical Scheme (GEMS).

 The deal is worth just over R700m. It will give Sanlam a large stake in SA’s biggest health risk management services provider and the country’s third-biggest medical aid administrator. AfroCentric owns Medscheme.

 Sanlam is currently a medical aid administrator for two closed schemes, Camaf and Malcor, which have a combined total of about 30,000 principal members. However, SMH remains a minnow compared to the likes of Metropolitan Health and Discovery Health, whose parent companies are Sanlam’s major competitors.

 Sanlam group CE Johan van Zyl says the deal is not a money-spinner for the insurer, but will close critical gaps in its business.

 One of the lingering problems in Sanlam’s business has been the absence of health-care products, which makes it difficult for brokers to offer a comprehensive solution to the insurer’s clients.

 Van Zyl says this is one of the shortcomings he is trying to address with the diversification of the company. He likes health care because of its higher intensity in that customers are more engaged with the service provider than the typical life insurance policyholder — something he believes builds brands. Health also has the potential to reach more customers.

 The immediate benefit for both companies is access to each other’s client databases. Sanlam has 3m policyholders and Medscheme has more than 3.2m lives under its management.

 Van Zyl says this “is a win-win situation” for both firms.

 Avior Capital Markets analyst WJ de Vries says Sanlam’s motive for the acquisition of a 27% effective stake in Medscheme is defensive.

 “Sanlam wants to offer its tied agents a comprehensive financial solution to sell to their customers which includes a strong medical aid product,” says De Vries in a note to clients.

 “In our view management do not need a majority stake to extract synergies from the transaction. We expect Sanlam’s loyalty programme, Reality, to be integrated with Medscheme to enhance the offering.”

 Reality is managed by Real Futures, a wholly owned subsidiary of Sanlam.

 However, De Vries warns that Sanlam’s use of technology to provide accurate, timely and tailored financial advice to its customers is not as strong as Liberty’s, Discovery’s or MMI’s, which could be a disadvantage when attracting tied agents.

 The deal is equally a milestone for AfroCentric, although the group has not explained why it decided to sell and what it intends to do with the R542m additional cash it will have after paying off its debt with the Sanlam investment. The black-controlled investment firm has historically kept a low profile.

 AfroCentric was established in 2006 and has acquired a few companies within this industry sector — including Helios and Allegra.

 Chair Anna Mokgokong says the transaction gives AfroCentric access to Sanlam’s extensive local and global distribution network and a suite of financial products. “We will evaluate exceptional opportunities that come our way, focus on how best to continue growing across all measures and delivering the best value to our shareholders,” she says.

 One possibility is that AfroCentric intends to piggy-back on Sanlam’s global expansion, specifically its pursuit of emerging markets.

 Medscheme has already positioned itself as a service provider of choice in some key countries on the African continent, though it remains small outside SA.

 It has operations in Botswana, Namibia, Mauritius, Swaziland, Kenya and Zimbabwe.

 It says its operations in Mauritius provide a platform for further international expansion.

 Outside Africa it provides health management and technical support services to clients in Ireland.

 In June, newly appointed CE Kevin Aron told the Financial Mail that Medscheme was looking for opportunities in East Asia, and in the rest of the countries where it already has a presence. He said the firm planned to grow through acquisitions and diversification of its product range. It has been helping the Road Accident Fund to process back claims.

 Aron was not available for an interview this week.

 In the short term, however, growth is likely to come from SA, where Medscheme has been steadily growing over the past few years.

 Medical aid administration is a critical service in the management of the complex medical aid industry.

 It remains a resilient business despite the Council of Medical Schemes having capped administrators’ fees to 10% of the medical aid income.

 Figures released by the Council for Medical Schemes show that last year total non-health-care expenditure was R14.4bn. This includes administration, managed care and broker fees.

 Discovery Health has the biggest market share in terms of income while Medscheme and Metropolitan Health are neck and neck.

 This means Medscheme has the latitude to grow further by gobbling up small operators who are battling to cope with the demands for sophisticated and expensive technologies that medical aid schemes need if they are to curb fraud.

 Sharing (with Metropolitan Health) in the administration of GEMS claims has demonstrated its ability to manage big schemes. It could take advantage of the excess cash from its parent to bolster its scale.

 • GEMS had a joint contract with Medscheme and Metroplolitan Health in 2013. The membership was inclusive of both administrators.


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