For corporate watchers, billionaire brothers Malvinder and Shivinder Singh were not the ones who would pull an odd one out from their bag. But all that changed three years ago when they sold their flagship group firm Ranbaxy Labs to Japan’s Daiichi Sankyo in a multi-billion dollar deal. And their recent group strategy has been a mix of surprises, bold moves, setbacks and some intriguing decisions.

On Thursday, Fortis Healthcare (India) Ltd said that it had an in-principle approval from its board of directors to acquire around 86 per cent stake in Super Religare Labs. The board of the company that recently launched two new business verticals, C-Doc for Diabetes & Metabolic diseases and Stem Cell therapy centres, also approved setting up standalone dialysis centres.

The company did not disclose the value of the deal, nor revealed the names of the shareholders who would sell their stake to Fortis. Although Fortis can also buy fresh shares of SRL to acquire the stake, that alternative is realistically ruled out as SRL is already awaiting market regulator SEBI’s approval for a public issue. Issuing new shares worth 86 per cent post-issue capital to Fortis would lead to significant equity dilution that may not be possible unless the company pulls back its draft prospectus and refiles with a new proposal.

On the face of it, the deal fits in with the logical strategy of integrating operations of two healthcare services companies which have some complementarities. After all, Fortis Healthcare (India) is the country’s second largest private hospital network operator (after Apax Partners-backed Apollo Hospitals) and it can draw on synergies by aligning with a group firm that is into diagnostics.

For sure, SRL has a strong franchise. It has a network presently consisting of eight reference laboratories, seven centres of excellence, 181 network laboratories (164 pathology, 17 radiology), 15 wellness centres and 888 collection centres (including 23 abroad). In 2010-11, SRL performed approximately 34,000 diagnostic tests per day. Last year, it had strengthened its position by acquiring Piramal Diagnostic Services Pvt Ltd (PDSPL) that specially boosted its presence in the radiology services.

Not surprisingly, that’s the official line too. Commenting on the proposed acquisition, Shivinder Mohan Singh, managing director of Fortis Healthcare (India) Ltd said, “We see great benefit in augmenting the Fortis presence with new speciality-based verticals. The addition of diagnostics and retail dialysis will help enhance the quality of care to our customers. This will better enable Fortis to deliver end-to-end medical service for all.”

Deal math

As indicated in our earlier report, SRL is eyeing a valuation of around Rs 1,500-1,600 crore. If this is used as a benchmark, promoters will earn a cool Rs 1,300 crore ($300 million).

Together, the Singh brothers own 81.5 per cent stake in Fortis Healthcare (India). This means they are essentially selling a privately owned business to a public-listed group firm without letting off the management control. So Fortis will pay some money to its own promoters to buy SRL, either before or after the proposed IPO.

A Reuters report quoted a Fortis spokeswoman as saying that the ‘valuation shall be carried out by an independent, one of the top four firms in India and thus the transaction will be carried strictly at arm’s length basis.’ It added that only independent directors of Fortis decided on the buyout of SRL, eliminating any corporate governance issues that could have come from a transaction within the group firms.

Intra group deal

There can still be an issue of conflict of interest in this transaction as is rumoured in most other intra-group deals involving a listed company in India.

Now, Fortis Healthcare (India) has six independent directors on its 10-member board: Gurcharan Das, Preetinder Singh Joshi, Rajan Kashyap, Tejinder Singh Shergill, Savinder Singh Sodhi and Balinder Singh Dhillon.

Dhillon is a professional by occupation. He has graduated from the Punjab University, is a member of the Institute of Company Secretaries of India and Bar Council of India and also holds a Master of Law degree from the McGill University, Canada. He has worked with entities including Hindustan Lever Ltd (India) and INTRIA Items Inc. (Canada), a wholly owned subsidiary of CIBC Bank, Canada, and has approximately 16 years of experience in law, governance, strategic planning and implementation.

Dhillon is the son of Gurmukh Singh Dhillon who also happens to be the father of the current spiritual guru of a religious group called Radha Soami Satsang, an offshoot of Sikhism. Incidentally, Malvinder and Shivinder Singh are closely associated with the religious group and their association has also brought equity ownership to the Dhillons in key group firms.

Gurkirat Singh Dhillon and Gurpreet Singh Dhillon together own 17.8 per cent stake in Religare Enterprises. Dhillon’s family also happens to be a significant minority shareholder of SRL.

SRL’s shareholders also include Logos Holding Company Pvt Ltd that owns 8.56 per cent stake. Last December, SEBI had granted a waiver to Logos Holding Company for acquiring over 15 per cent from various Dhillon family members through transfer of shares without triggering an open offer, as it was a closely held company belonging to the Dhillon family. Incidentally, Logos Holding also owns shares in a few other private group firms of the Singh brothers, including Religare Voyages and Shimal Research Laboratories.

This means an independent director of a listed company was part of the body taking decision to buy a private firm in which his own family has a large minority stake. To be fair, Logos is not selling its stake to Fortis. This is because Logos is not listed as a promoter/promoter group shareholder in SRL, who are to sell their shares to be acquired by Fortis.

According to the draft prospectus of SRL, promoter & promoter group firms hold 85.6 per cent in the company. It is this stake that is expected to be sold off to Fortis. Incidentally, this includes 32 per cent stake held by another public-listed firm majority owned by Malvinder & Shivinder Singh – Oscar Investments. Oscar Investments scrip opened 4.4 per cent on Friday, although it has moderated since early trading hours. Oscar’s stake can be valued at around Rs 500 crore.

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