Avigo Capital Partners, an SME focussed private equity fund, has picked up 9.27% of the post investment equity share capital of Super Religare Laboratories Ltd (SRL) for Rs 100 crore in a pre-IPO deal. SRL, presently a privately held company of billionaire brothers Malvinder and Shivinder Singh who are selling their majority stake to a public listed group firm Fortis Healthcare (India), offers diagnostic testing (including pathology and radiology), preventive care testing and clinical research trial testing has a strong franchise.

SRL has filed for an IPO on February 17, 2011, in which it proposed to issue upto 28 million equity shares of face value Rs 10 each (including a private placement of up to 8 million equity shares through a pre-IPO placement) through a book building process. The document is awaiting clearance from SEBI.

Avigo's investment will value the company at close to Rs 1,078 crore (pre IPO). Back of the envelope calculations show Avigo would have subscribed to around 5.31 million shares at a valuation of Rs 188 a piece. If this is taken as a benchmark for IPO as well, post public issue the company would be valued at Rs 1,500 crore ($ 340 million).

According to analysts, SRL has attracted a premium as it's going to be the first listed diagnostics services company as also because it is the largest player in the field. Last year SRL acquired Piramal Diagnostic Services Pvt Ltd for $128 million (Rs 600 crore) to strengthen its presence in the radiology services that also made it the biggest diagnostics chain in the country.

Achal Ghai, Avigo’s Founder & Managing Partner, said: “We are confident about exponential growth of diagnostic services in India and overseas for SRL. This sector is likely to attract large investments in the near term and SRL is by far the front runner in the organized sector in India and parts of Asia.”

As of December, 2010, SRL had a network, either directly owned by it or operated through franchisees or joint ventures, of eight reference laboratories, seven Centres of Excellence, 181 network laboratories (comprising of 164 pathology and 17 radiology laboratories), 15 wellness centres and 888 collection centres (including 23 abroad).

Malvinder Singh and Shivinder Singh, the promoters of SRL, recently got a nod from the board to sell their 86% stake in SRL to the listed Fortis Healthcare (India), ahead of the proposed public issue. The buyout by Fortis is intended to be a consolidation exercise to bring SRL’s diagnostics business under the Fortis umbrella.

At Rs 188 per share (the estimated deal value for Avigo) Fortis Healthcare (India) would need to shell out around Rs 837 crore ($190 million) to buyout promoters stake.

Fortis Healthcare (India) scrip lost 2.13% to close at Rs 158.65 at BSE in a weak Mumbai market.

Although Avigo-SRL deal happens to be the first pre-IPO deal in a diagnostics services space, the sector has seen many private equity deals. Most recently, TA Associates acquired a little more than 16% stake in Dr Lal PathLabs for Rs 163 crore ($35 million). TA Associates bought the stake from Sequoia Capital India in a secondary deal pegging the valuation at around Rs 1,000 crore. Last year also saw Warburg Pincus buying out ICICI Ventures in Metropolis Healthcare.

The pathology market is currently 2.5 per cent of the overall healthcare delivery market. There are 40,000 independent path labs in the country and the industry is highly competitive and price-driven with kickbacks and business referral payments in the absence of a regulatory body. Around 70 per cent of treatment decisions in the country are based on lab results.

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