Thank you for standing by, and welcome to the Integral Diagnostics announcement on the merger with Capito l Health. All participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Dr. Ian Kadish, CEO. Please go ahead.
Thank you very much, Darcy. My name is Ian Kadish. I'm the Chief Executive and Managing Director of Integral Diagnostics. I'm joined here this afternoon by Craig White, who is our Chief Financial Officer. We're very pleased to be speaking to you this afternoon about a transformative merger between Integral Diagnostics and Capitol Health. We're very pleased to have entered into an implementation deed in respect of our proposed merger with Capitol. This represents a significant milestone and comes after a number of weeks of confirmatory due diligence. The clinical, strategic, and financial benefits of this merger move forward to working with the team as we pursue our ambition of being the leading diagnostic imaging provider in the ANZ region. The call this afternoon is a specific purpose call to discuss the merger on it.
Period with regard to our financial year 2024 results, which we will be releasing on the 27th of August. The merger is transformative in that it combines two highly complementary businesses and will realize significant benefits for patients, doctors, and shareholders. The merger creates a leader in ANZ diagnostic imaging, and we believe it will unlock significant value for shareholders of both companies. We have full alignment with Capitol's board, who have unanimously recommended the transaction to their shareholders. Our vision for our combined business is to be the ANZ leader in diagnostic imaging, to deliver the best-in-class clinical service, technology, and capability, to achieve the optimal health outcome for our patients and our referrers, and to provide the leading platform to attract and retain radiologists and other key professionals. The merger terms remain largely unchanged. We announced in the Implementation Deed last month.
Capitol shareholders will receive 0.124849 Integral shares for every Capitol share. Integral and Capitol shareholders will own approximately 63% and 37%, respectively, of the combined group. Based on Integral's closing share price on the fourteenth of June, the merger ratio implies an offer price of 32.64 cents per Capitol share, representing an equity value of AUD 351 million and an enterprise value of AUD 413 million for the Capitol Group. The enterprise value of the financial year 2025 forecast EBITDA acquisition implies a multiple of 8.1x, including pro forma anticipated pre-tax net cost synergies of AUD 10 million, and about 10.0 times before those synergies are included.
The combined pro forma FY 2023 revenues of the group comprises AUD 651 million, with an enterprise value of approximately AUD 1.2 billion. With regard to board and management, the board will be comprised of the existing Integral Diagnostics directors, with Toby Hall as Chair. Two of Capitol's directors will join the board of the combined group as independent non-executive directors. I will be the Managing Director and Chief Executive of the combined group, and Justin Walter will move into the transitionary role to drive the integration. The board of Capitol unanimously recommends that Capitol shareholders vote in favor of the merger in the absence of a superior proposal, and subject to an independent expert concluding and continuing to conclude that the merger is in the best interest of Capitol shareholders.
Subject to these qualifications, each Capitol director has confirmed that they intend to vote any shares that they hold or control in favor of the merger. Integral intends to pay a final dividend for the financial year ending 30th June 2024, in line with its ordinary course dividend policy. Capitol may determine and pay a fully franked final dividend for the financial year ending 30th June 2024, provided that the dividend per Capitol share is no more than the final dividend per Integral share, as determined by Integral, multiplied by the merger ratio and minus the adjustment as determined by Capitol within parameters that have been agreed between the parties. The merger is subject to customary court, regulatory, and Capitol shareholder approval.
There are other conditions in the merger Implementation Deed, which is attached to our transaction announcement, and we expect completion to occur in the fourth quarter of this calendar year. The merger provides attractive strategic and financial benefits, a significantly enhanced scale with a nationwide footprint of 155 clinics, supported by more than 350 radiologists and about 3,000 employees. The merger provides a best-in-class clinical platform for patients, for doctors, and for referrers. It's a financially attractive opportunity. Confirmatory, confirmatory due diligence has reaffirmed at least AUD 10 million of anticipated pre-tax net cost synergies, with the majority expected to be realized within the first year post-implementation. We expect to deliver the pro forma FY 2025 EPS accretion to Integral shareholders, including the cost synergies, and there will be additional upside from potential administrative and revenue synergies over time.
Our platform is well-positioned for future growth. It provides an improved ability to invest in higher-cost imaging modalities like PET/CT and MRI. It provides an opportunity to grow teleradiology volumes by offering Integral's leading teleradiology platform, IDxT, to Capitol clinics and radiologists. And it puts us into a stronger financial position to pursue value-accretive investments, including M&A. Just a brief overview of Capitol Health. Capitol employs 107 radiologists in 65 clinics through eight key brands. The brands include, in Victoria, Capitol Radiology, FMIG, Direct Radiology, and Imaging at Olympic Park. In Western Australia, Capitol has nine clinics under the brand Capitol Radiology. In Tasmania, Capitol has Radiology Tasmania with six clinics, and then two clinics under the Fowler Simmons Radiology brand in Adelaide.
The overview of the combined group on page six shows the significant financial and operating scale that the combined group delivers. The expected earnings using the FY 2023 numbers, combined earnings towards including synergies on a pre-AASB 16 EBITDA basis, would comprise AUD 103 million, and on a post-AASB 16 basis, would total AUD 135 million, representing a margin of 21%, an operating margin of 21%. As we can see on the following slide 7, the footprints of the two companies are very complementary. There's very little overlap in Victoria, despite the fact that Capitol have 48 clinics and IDX have 20 clinics in Victoria. Capitol's clinics are located in the greater Melbourne region, whereas the Integral Diagnostics clinics are in Western Victoria, in Ballarat, Geelong, Sunbury, and Melton.
We also both have clinics in Western Australia, and the merger provides the combined entity with scale in Western Australia that we do not individually have. Useful scale. The merger gives Integral shareholders access to South Australia through the two Fowler Simmons clinics in Adelaide, and provides us with access to Tasmania through the six Radiology Tasmania clinics. It also provides Capitol shareholders with exposure to Queensland and to New Zealand. The combined platform drives optimal outcomes for patients, doctors, and referrers. As far as patients are concerned, the platform provides access to increased subspecialty expertise across the network, a wider breadth of patient services, including high-end imaging modalities. An AI-powered scan triaging and enhancing detection capability that prioritizes urgent cases that's used at Integral and will be now used across the combined group.
It also provides the ability for the overnight reporting enabled by Integral's teleradiology arm, IDxT, to be used across the Capitol business. In terms of doctors and, and specialists, it provides fellowship training and development and research programs and ability to do more in those areas. With regard to referrers, it allows us to provide a quicker turnaround time for referrers to access a patient worklist. It also provides increased network density, which allows improved clinical access and labor management across the network, and it improves the number and the scale, the size of our referral networks. It really builds on the Integral maxim that, that good medicine is good business. I'm going to hand over to Craig now to talk about the cost synergies, the revenue synergies, our positioning for future growth, and the integration framework for the combined entity.
Thanks, Ian, and good afternoon, everybody. As Ian mentioned, confirmatory due diligence over the last four weeks or so has confirmed at least AUD 10 million in annual pre-tax net cost synergies, with the majority to be achieved within one year post-implementation. And we see that there's potential for future upside beyond that. The key areas of expected synergies are corporate function, mainly listed company costs, as well as indirect procurement and clinical costs. And the majority of these cost synergies, as you would expect, are from the consolidation of overlapping corporate function costs. It's important to note that we've factored in dyssynergies in our evaluation of this number of AUD 10 million, and these dyssynergies relate to potential adjustments required for remuneration and an additional role focused around ESG.
As I mentioned, to be fair, it would come partly related to AI-enabled technology to use tertiary increases. To implement a transaction, which in total is expected to be AUD 45 million. Currently, relates to transaction costs in total, and the remaining AUD 20 million roughly relates to an accelerated Capitol joint venture liability payment. Just turning to the next slide on revenue synergy opportunities. We expect further upside for improvements across the ANZ, additional revenue opportunities. The doctor's productivity improvements include the rollout of Clario across the combined business, which will improve load sharing and utilization and promote subspecialty reporting. And Clario, in particular, will enable us to leverage the teleradiology part of the business across the enlarged network. Scale and network benefits include improved capability to invest in high-modality services, secure additional national contracts, cross-referral specialist radiology services, and radiologist staffing benefits. Turning to the next slide.
Post-merger, the enlarged group is very well positioned for future growth. The merger will drive this future growth through investment in the higher-end equipment and teleradiology, with an opportunity, as I said, to materially increase the contribution from IDxT, our teleradiology business, which is currently about 15% of IDX group revenue. The increase in that contribution will come by offering participation to Capitol's radiologists and leveraging the platform, as I mentioned. As I mentioned previously, due diligence has confirmed that the merger will accelerate payments under certain of Capitol's joint venture agreements. The total one-off costs associated with these JV liabilities is expected to around AUD 19.5 million addition to the merger. Notwithstanding these one-off costs, we've also achieved radiologist alignment with long-term incentive arrangements in place linked to future earnings growth.
Importantly, the merger delivers improved leverage position of 2.6 times on a pro forma basis and including synergies, and we expect that downwards, which will put us in a strong financial position to pursue further value-accretive investments, including M&A. Turning to integration on slide 12. We're going to take, as you can see, a very careful and measured approach in integrating Capitol to ensure the positive elements of both businesses are preserved, including culture. We have a clear set of integration principles between ourselves and Capitol, and we've established a cross-functional project management team with managers from both Integral and Capitol, led by Capitol CEO, Justin Walter.
So in summary, just to complete, the pieces that I wanted to talk to, I think the key takeaways are: confirmatory due diligence has confirmed synergies of at least AUD 10 million on a post-tax net basis, some dyssynergies. We expect the pro forma leverage to be 2.6 downwards, and that we expect the transaction to deliver double-digit EPS accretion on a pro forma basis. So with that, I'll pass you back to Ian. Thanks, Ian.
Thank you very much, Craig. We'll go over to a question-and-answer session now, and I'll make some closing remarks at the end. So Darcy, if we can, hand over to you to run the Q&A program, please.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Tom Godfrey from Ord Minnett. Please go ahead.
Oh, good evening, Ian and Craig. Thanks for taking my questions. Can you hear me okay?
Yes, we can, thanks, Tom.
Great. Yeah, good day, guys. Maybe just first one, you referenced a few times there, just the benefit over and above the AUD 10 million of net cost synergies. Was there work done in the confirmatory DD to sort of understand what the quantum there might look like and what the timeline to achieving those over and above the AUD 10 million might be?
Yeah, Tom, so taking your question in two parts, yes, there has been additional work that we've done, and quite detailed work. There'll obviously be more work done. But essentially, that work has proved up that there will be additional revenue synergies as well as some additional cost synergies. In terms of the time to realize those, obviously we haven't put a number on them. But as I said, we feel confident that there's at least AUD 10 million of synergies there. And, you know, that's probably as much as we can say at this point.
Understood. Just around the integration and one-off costs, the AUD 20 million in Capitol JV liabilities, can you just give us a bit more detail on what those are and sort of how that's been determined through DD?
Yeah, I think, Tom, you know, importantly, you know, as we led up to the announcement of the implementation deed previously, you know, we were aware that there were change of control provisions in certain joint ventures within the Capitol Group. And that those amounts which we factored in when we made the announcement previously at the time of implementation deed have effectively been confirmed in due diligence. They are amounts that would've been paid by Capitol, but are accelerated by virtue of the change of control.
Got you, and just last one from me. I know it wasn't sort of a chief concern going into this, just given the lack of overlap across the two footprints, but has there been any engagement with the ACCC, any sort of informal clearance or anything you can speak to there?
Yeah, sure, Tom. I mean, I think as part of the process between now and, you know, when we've obviously signed the merger Implementation Deed today, we are preparing a submission to the ACCC. We feel, you know, confident that, you know, there really aren't any areas of concern, certainly nothing material. And, but look, obviously, we will work our way through that process over the next couple of months, while Capitol work to put together their, you know, scheme booklet and go through that process.
There is surprisingly little overlap, Tom, between our footprint in Victoria and Capitol's footprint. And in Western Australia, where there is some overlap, there is significant competition in the area. So we don't anticipate that there'll be challenges from the ACCC.
Got it. That's clear. Thanks for taking my questions, guys.
Thanks, Tom.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. We'll now pause a moment to allow for any final questions to register. Thank you. Your next question comes from Shuo Yang from Microe quities Asset Management. Please go ahead.
Good afternoon, guys. Can you just talk through the remuneration for the radiologists, the differences that you sort of discovered between the two businesses? If you can maybe just talk in broad strokes.
Thanks, Shu. The radiologist reimbursement, the total reimbursement is surprisingly similar between the two groups. We have compared radiologists' costs, both in terms of absolute magnitude of cost and also a percentage of revenue. And we were, you know, pleasantly surprised to see that as a percentage of revenue, the costs were very comparable across the two groups. And once adjusted for productivity in the different specialty areas and part-time versus full-time, contractor versus employee, we did not discern any material differences between what their radiologists were earning and what ours were.
So overall, we were, I suppose, pleasantly surprised to just note the similarities. Capitol does seem to have more radiologists who are paid on a percentage of billings versus the structure we have in Victoria, which is more a salary with opportunities for outperformance. But at the end of the day, when you, you know, compare the radiologist's cost to what each radiologist bills, they were remarkably similar.
Okay. And in terms of other clinical staff and other non-clinical staff, is there any sort of broad differences in terms of remuneration?
There are some differences, nothing to call out in particular, but where the differences are there, it's for clinical staff, largely in areas where we don't overlap. There's very little overlap in clinical areas that we would need to, you know, look at equalizing staff benefits. So particularly in Victoria, which is where, you know, most of their clinics are and where we have, you know, 20 clinics of our own, there would be limited to, you know, three or four clinics where we would need to look at each level to determine whether, you know, adjustments need to be made.
I think probably just to add to that, Shuo, as well, as I mentioned earlier, in coming up with a number of, you know, at least AUD 10 million in synergies, we have allowed for some dyssynergies, including adjustments to remuneration. So, you know, as Ian's saying, I think we're broadly equivalent across the organizations, but we've allowed for, you know, for some adjustments.
Understood. All right, thanks, guys.
Thanks.
Thank you. There are no further questions at this time. I'll now hand back to Dr. Kadish for closing remarks.
Thank you, Darcy. In closing, I'd like to recap some of the key benefits of the merger. The merger provides us with significantly enhanced scale. It provides a platform to drive best-in-class clinical outcomes for patients, for doctors, and for referrers. The financial opportunity is compelling, and the merger also fosters our platform and really provides an excellent platform for future growth. It creates a leader in diagnostic imaging across the ANZ, and this will benefit patients, doctors, and shareholders. We're looking very forward to working with the Capitol team over the next several months to complete this merger in the last quarter of this calendar year. Thank you all very much for participating this afternoon, and we look forward to engaging with you when we announce our results in August.
Thank you. That does conclude our conference for today. Thank you for participating.