Private equity major Warburg Pincus is exiting its investment in the healthcare arm of Analjit Singh’s Max India at par, ahead of its proposed rights issue. Max India has said on Friday that it is buying the 16.37 per cent stake held by Warburg Pincus in Max Healthcare Institute Ltd for Rs 140 crore.
The deal is expected to be completed by December 15 this year and will increase Max India’s shareholding in Max Healthcare to 91.84 per cent.
Warburg’s exit comes after the board of Max Healthcare approved Rs 150 crore rights issue last month. Max Healthcare reported 28 per cent increase in revenues at Rs 685 crore, with EBITDA growing 121 per cent to Rs 51.9 crore.
Although Warburg Pincus has not taken any haircut in this deal, the PE firm has lost out on an opportunity cost basis. Warburg Pincus had invested Rs 140 crore in two tranches in January, 2005, (Rs 25 crore) and June, 2005 (Rs 115 crore).
What Went Wrong For Warburg?
VCCircle deep dived into the financials of Max Healthcare to figure out why the PE firm could not generate much out of this transaction since Max Healthcare has only grown in size during the past six years. Warburg invested in Max Healthcare in early 2005 at a post-money valuation of around Rs 609 crore. At that time, Max Healthcare was still in its early growth stage.
For the year ended March, 2005, its total income stood at Rs 49.4 crore, with negative EBITDA of Rs 10.95 crore and net loss of Rs 36.29 crore, according to the data compiled by VCCedge, the financial research platform of VCCircle. For the following year, its EBITDA rose to Rs 7.65 crore. This means, Warburg Pincus invested with one year forward EBITDA multiple of 80x, six years ago.
For the year ended March, 2011, Max Healthcare clocked EBITDA of Rs 51.9 crore. This implies that the PE firm exited at an EBITDA multiple of 16.4x. So, while the latest transaction appears to have been struck at a reasonable valuation, the prospective gains were lost due to its initial investment being at a pretty high valuation.
It May Still End Well For Warburg
Warburg Pincus continues to be a major shareholder in the group holding firm Max India, in which it holds 15-16 per cent stake through its entities. Warburg is currently sitting at 4.44x of its Rs 200 crore investment in Max India, which it made in 2004. Warburg had made a partial exit in 2009 by selling 5.6 per cent stake for Rs 246 crore, making over 5x in the process.
Other investors in Max India include Goldman Sachs Capital Partners, World Bank’s International Finance Corporation and Singapore sovereign wealth fund Temasek.
Besides Max Healthcare, group firms include life insurance JV Max New York Life, health insurance JV Max Bupa Health Insurance Ltd, clinical research firm Max Neeman Medical International and Max Speciality Films.