Fortis Healthcare Eyes Big SRL Demerger To Unlock Value
This article was originally published in PharmAsia News
Executive Summary
Fortis Healthcare, a leading Indian hospital chain controlled by billionaire brothers Malvinder and Shivinder Singh, has announced it is looking at a plan to spin off its diagnostic division SRL into a standalone unit - a move that could pave the way for a lucrative stock market listing.
NEW DELHI - Indian hospital chain Fortis Healthcare, a listed company, has said it is mulling a plan to demerge its SRL Diagnostics arm and turn the country's biggest such business into a standalone entity to unlock value for the company's investors. The proposed step is being seen as a prelude to a possible initial public offering (IPO) for SRL.
Fortis, the country's second-largest health care company, said in a statement its board would "assess and evaluate a demerger of the diagnostics business of the company… in addition to other options that may be available to unlock and monetize value inherent in this business.”
The SRL demerger proposal, first unveiled May 26, was followed by a restructuring plan announced a day later by Religare Enterprises, the listed financial services conglomerate controlled by the Singh brothers. Religare said it would separately list its three divisions operating in finance, health insurance and capital markets, a step that will "simplify our corporate structure" and "also help in unlocking and maximizing value for all stakeholders."
The corporate developments come as Malvinder and Shivinder Singh, the two brothers who control Fortis, have been told by a Singapore arbitration panel to pay a INR25.6bn ($385m) fine over the sale of their 34.8% stake in Indian generics giant Ranbaxy Laboratories Ltd. eight years ago to Japanese drug company Daiichi Sankyo Co. Ltd. for $2.4bn. Daiichi alleged the brothers "concealed and misrepresented facts" about Ranbaxy's US regulatory woes when selling the company.
On May 25, Daiichi told the Delhi High Court it had "an imminent fear" that the brothers would dispose of their assets and take the proceeds out of India. But lawyers for the brothers, who when the case was launched had dismissed Daiichi's allegations as "baseless," assured the court the Japanese company's fears about defaulting on any payment were unfounded (Also see "Golden Week For Daiichi: Damages Due From Ranbaxy Brothers" - Scrip, 8 May, 2016.).
In an interview published June 6 with India's Mint newspaper, Singh family friend and Religare managing director Sunil Godwani said that the Religare restructuring was in no way related to the fine awarded in early May. "The [Religare] demerger is logical," Godwani told the newspaper, saying the move had been in the works for eight months.
Ranbaxy "is a long-drawn case. For the operating companies there is zero implication. I don't think the money is going to get paid. It will be fought, legal people will decide," Godwani added.
RHC Holding, a private limited company in which the Singh brothers hold a majority shareholding and which controls Fortis and Religare, has said the company is "exploring further legal options to challenge" the fine levied over Daiichi's accusations about Ranbaxy's US regulatory woes when selling the company.
Daiichi, which racked up big losses from manufacturing problems at Ranbaxy, finally sold the company in 2014 for $4bn including $800mn debt, to Indian generic heavyweight and turnaround specialist Sun Pharmaceutical Industries Ltd. (Also see "Sun Profit Dives On Ranbaxy Merger Costs" - Scrip, 8 Nov, 2015.).
Other IPOs Fan Hopes
SRL stakeholders' expectations about the money that could be raised from a listing of the company have been fanned by successful IPOs by its competitors, in particular Dr Lal PathLabs Ltd, according to a report in The Economic Times on May 26. Last December, Dr Lal Pathlabs staged an INR5.50bn IPO and the shares listed at a 31% premium to the offer price at INR720 (Also see "Eager Investors Snap Up Indian IPOs On Positive Health Care Outlook" - Scrip, 14 Dec, 2015.).
The Singh brothers hold combined equity of than 70% in Fortis Healthcare, which in turns owns 57% of SRL. Private equity funds, which include International Finance Corp, NYLIM Jacob Ballas and Avigo Capital Partners, hold a combined 34%, and individual investors hold the balance.
Dr Lal Pathlabs' shares closed up 3.35% on June 3 after the company reported net profit for the final quarter ending March 31 surged 20% to INR344m, and zoomed to INR990 on that day. Citigroup late last month maintained a "buy" on the shares with a 12-month price target of INR1,140.
Shares of another Fortis rival, Thyrocare Technologies Ltd, debuted May 9 at a 49% premium to the issue price, at INR665. In contrast, shares of Fortis, which holds 57% of SRL, were trading June 3 at INR159.85.
Diagnostics has become a red-hot sector as spending on healthcare rises in India. The industry is expected to grow at a compound annual growth rate of 16-17% to reach INR601bn by fiscal year 2018, leading Indian ratings agency Crisil forecasts. Stand-alone diagnostic centers now hold around 48% of the market.
SRL, which has 273 laboratories, had total revenue of INR7.74bn in the fourth quarter to March 31, an increase from INR7.22bn in the same year-earlier period. It recorded an EBIDTA margin of 24.1%, up from 20.4% in the year-ago quarter and significantly higher than the 9.7% margin it logged in financial year 2011-2012.
Fortis, a countrywide chain of 55 hospitals, on May 26 reported a consolidated net loss of INR90.1bn for the fourth financial quarter to March 31, 2016, a five-fold increase from the same period the previous year of INR17.5bn, though it said the results were not directly comparable due to international divestments.
Valuation Differences?
Media reports said there had already been talks earlier with buyout funds but that differences over valuations had so far prevented any deal on SRL. The Singh brothers were looking at a valuation of about INR60bn for SRL while potential investors were looking at a price of INR40bn, The Economic Times said in an article May 26. In 2011, Avigo bought a 9.27% stake in SRL for INR1bn, which then valued the company at INR10bn.
Buyout funds were unwilling to purchase a minority stake and the Singh brothers were unsure about ceding control as this might affect Fortis's valuation, but were open to considering the idea, according to media reports.
The Singh brothers, ranked 35th in the Forbes List of richest Indian billionaires in 2015, have been targeting the domestic market, focusing on building a domestic healthcare and financial services network, after staging a U-turn from an aggressive regional expansion. They snapped up overseas assets in Singapore, Vietnam, Hong Kong and elsewhere but had sold most by 2015 as their group sought to slash debt.
The younger sibling, Shivender, late last year withdrew from active business responsibilities to devote his time to doing "direct service" and “giving back to society a little of what I have received in abundance” by working for a philosophical and spiritual group, Radha Saomi Satsang Beas, with which his family has long ties.
Shivender is now non-executive vice-chairman of Fortis and Malvinder is the firm's executive chairman.