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Fortis mulls demerger of diagnostics chain SRL ahead of public listing

26 May, 2016

Fortis Healthcare Ltd will look at demerger of SRL Ltd, India’s largest diagnostics chain by revenues, as an option before taking the subsidiary public, the firm said on Thursday.

The company said it is looking at other options too to monetise its investments in SRL.

While SRL is already a subsidiary of Fortis and does not essentially require to be demerged for an initial public offering (IPO), a demerger would give existing shareholders of Fortis a direct stake in SRL ahead of the listing, a company spokesperson said after the management released the hospital chain’s financial results.

A demerger would also mean that SRL will cease to be a subsidiary of Fortis.

It would also provide SRL’s existing PE investors an option to exit the diagnostics firm even if the proposed listing gets delayed further in the future.

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.

SRL had hired investment bank Moelis & Co last year to advise on a deal to give exit to existing investors, several media reports had said earlier. Baring Private Equity Asia, Bain Capital and Capital International, among others, were in talks to buy the stake from existing investors, The Economic Times had reported.

“What we have decided now in consultation with the private equity players would be a listing process to unlock higher value for the company,” the spokesperson said. The process will take some months, he added.

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 on debut, giving a thumbs up to the diagnostics sector as a whole.

Dr Lal PathLabs commands a market cap of over Rs 8,100 crore.

SRL was earlier a private firm controlled by billionaire brothers Malvinder and Shivinder Singh. It had also filed its papers for an IPO 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.

As of March 31, 2016, SRL had a network of 314 labs and about 7200 collection centres. SRL performed over 14.5 million accessions during FY16, a 6% growth over last year. Through these accessions it undertook 32.7 million tests, up 8% compared with 30.4 million tests in FY15.

SRL saw revenues rise 6% to Rs 764 crore last financial year with its pathology business contributing 88% to its total revenue in FY16 growing at 14% year on year. SRL’s EBITDA margin is a tad lower than its closest peer Dr Lal PathLabs.

With the demerger of SRL, Fortis would effectively complete the geographic and business diversification it started during 2011-12, buying diagnostics and international hospital firms owned privately by the Singh brothers. The firm has already completed the exit from the Asia-Pac healthcare service business as it focuses on its core Indian hospital business.

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Fortis mulls demerger of diagnostics chain SRL ahead of public listing

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