Fortis Healthcare set to turn its diagnostic chain SRL Diagnostics into a separate unit

Friday, May 27, 2016

Indian healthcare company Fortis Healthcare is set to turn its diagnostic chain SRL Diagnostics into a separate unit prior to getting it listed, thus providing an exit route to private equity investors, said two people familiar with the development. SRL Diagnostics had appointed Moelis & Co. advisor last year as part of efforts to give PE firms such as International Finance Corporation, NYLIM Jacob Ballas and Avigo Capital Partners an exit.

The board decided at a meeting on Thursday that it will evaluate a demerger and other options to unlock value, the company said in an announcement to the stock exchange. The move comes as Fortis Healthcare founders Malvinder and Shivinder Mohan Singh have assured the Delhi High Court that they will be in a position to pay a Rs 2,562 crore fine imposed by a Singapore arbitration court for having concealed information when they sold their stake in Ranbaxy to Daiichi Sankyo. The brothers plan to challenge the penalty.

Leading PE firms such as Baring Asia, Capital International and Bain Capital were said to have been in talks to acquire stakes in SRL Diagnostics from existing investors and even to build their collective holdings into a majority holding. But "the deal could not materialise due to valuation differences," said one of the people cited above. The PE firms couldn't be reached for comment. The successful listing of Dr Lal Pathlabs Ltd in December 2015, however, subsequently persuaded the promoters that a public issue may be a more lucrative option, said the second person.

Having sold shares at Rs 550 apiece for a valuation of Rs 4,550 crore, Dr Lal Pathlabs ended at Rs 980.85 on Thursday on the BSE for a market capitalisation of Rs 8,129 crore. Fortis Healthcare, which owns a majority stake in SRL Diagnostics, has a market capitalisation of Rs 8,047 crore at a share price of Rs 173.70.

Malvinder and Shivinder Mohan Singh were originally looking at a valuation of about Rs 6,000 crore for the business , while potential investors had pegged it at Rs 4,000 crore, said one of the persons cited above. Even though the stake-sale mandate was primarily for a minority stake, people cited above said the company was open to all strategic options, including relinquishing control.

Apart from the 34% held by PE firms and the 57% owned by Fortis Healthcare, individual investors own about 9% of SRL Diagnostics. If the demerger goes ahead, the Singh brothers--who own more than 71% of Fortis Healthcare — will end up holding a little over 40% directly in SRL. The public, which owns about 28% of the parent company, will hold about 16% in SRL after a demerger.

The stake of PE investors and other individuals in SRL — 34% and 9%, respectively—will remain the same in a demerged entity ahead of any subsequent public issue. In the past three to four years, SRL's business has grown at a compounded annual rate of 15% while the margin of earnings before interest, tax, depreciation and amortisation doubled to 20.4% in FY15 from 9.7% in FY12.

SRL Diagnostics' sales stood at Rs 722 crore in FY15 and at Rs 392 crore in the first half of the current financial year, with a margin of 25.7%, according to the Fortis Healthcare financial statement. SRL had 11 reference laboratories and 273 network laboratories with over 6,700 collection points as of May 31, 2015.


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