Fortis controlled diagnostics chain SRL to list via reverse merger with group firm

Fortis Healthcare Ltd said on Friday its board has approved a restructuring plan that would see its diagnostics business being spun out into a separate listed company without going through the process of an initial public offering (IPO).

The hospital chain operator said it will demerge its diagnostics business including the one housed under SRL Ltd, India's largest diagnostics chain by revenue, into a majority-owned listed subsidiary, as the hospital chain seeks to unlock value for its shareholders.

The demerged business units including SRL will be merged with Fortis Malar Hospitals Ltd, which operates a hospital facility in Chennai and is listed on the BSE, Fortis Healthcare said in a filing to the stock exchanges.

Prior to the merger, the hospital business of Fortis Malar will be sold to Fortis Healthcare by way of a slump sale for a lump sum cash consideration under a composite scheme.

Once the composite scheme becomes effective and the necessary statutory and regulatory approvals are received, the entire diagnostics business of Fortis Healthcare will be vested in Fortis Malar, it said. The name of Fortis Malar will eventually be changed to SRL Ltd, which will also be listed on the NSE besides its current listing on the BSE.

As part of the composite scheme, Fortis Malar would allot 0.98 fully paid up equity shares of Rs 10 each to Fortis Healthcare shareholders for every equity share of Rs 10 each held by them in Fortis Healthcare.

The equity shareholders of SRL will be issued and allotted 10.8 equity shares of Rs 10 each of Fortis Malar for every equity share of Rs 10 each held by them in SRL as on record date. Besides, Fortis Healthcare will pay Rs 43 crore as lump sum consideration to Fortis Malar towards acquisition of the hospital business of Fortis Malar.

The appointed date for the slump sale, demerger and merger is on January 1, 2017.

Post restructuring, Fortis promoters would own 41.92% of Fortis Malar (to be renamed SRL Ltd)

“As a result of the new synergistic groupings, both the hospitals and diagnostic businesses will benefit from greater clarity, a stronger focus and an independent growth trajectory. Equally, this will enable the accelerated pursuit of their respective business goals while empowering them to reach their fullest potential,” said Malvinder Singh, executive chairman, Fortis Healthcare.

JM Financial is advisor to Fortis Healthcare on the transaction while Yes Securities is advisor to Fortis Malar on regulatory matters. Consulting firm Price Waterhouse and Coopers was the advisor on the structuring of the transaction and Cyril Amarchand Mangaldas acted as the key legal advisor.

SRL’s long journey to the bourses

SRL hit the big league six years ago when it acquired the diagnostics business of Piramal Enterprises Ltd (then Piramal Healthcare Ltd).

At that time it was a private firm controlled by billionaire brothers Malvinder and Shivinder Singh. It had also filed its papers to go public and in early 2011 mid-market private equity firm Avigo Capital had invested in the IPO-bound firm. Later, it roped in Sabre Capital as another investor in what was seen as a pre-IPO transaction.

But soon thereafter, Singh brothers sold their stake in SRL to their public-listed hospital chain Fortis Healthcare for Rs 803 crore. At that time SRL was valued at Rs 1,076 crore. Subsequently, SRL scrapped its IPO plan.

A year later, IFC and Jacob Ballas came as new investors while Avigo put in fresh capital in SRL.

Last September, Fortis increased its stake in SRL by purchasing shares from mid-market private equity firm Sabre Capital and its related entities. This deal valued SRL at Rs 3,395 crore.

Fortis had said in May that it will look at demerger of SRL as an option before taking the subsidiary public.

Expectations were high on SRL reviving its IPO plans after sector rival Dr Lal PathLabs' IPO was oversubscribed 32 times and made a spectacular stock market debut in December. Recently, another diagnostic chain Thyrocare Technologies Ltd's IPO was oversubscribed 72.26 times and its shares too surged giving on debut--a thumbs up to the diagnostics sector as a whole.

While an IPO would have provided SRL's existing PE investors a window to exit the diagnostics firm through a public issue, the reverse merger would give them an exit pipeline as they can then sell their stake in the market as a public shareholder.

In February, Fortis had said it is in talks with a "number of investors" to facilitate an exit for SRL's existing private equity investors—International Finance Corporation (IFC), NYLIM Jacob Ballas and Avigo Capital Partners.

Shares of Fortis Healthcare on Friday ended at Rs 187.80, down 3.27% on the BSE in a weak Mumbai market. Fortis Malar shares last traded at Rs 57.1 each, up 2.98% on BSE.

The restructuring was made public after trading hours on Friday.

Fortis Healthcare's diagnostics business recorded revenues of Rs 192 crore during the quarter ended 30 June, up 7% from the year-ago quarter. As on 30 June, SRL had a network of 325 labs and about 7,300 collection points.

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