The big hospital merger: Aster DM, Care to sign deal next month

Industry:    3 months ago

Bengaluru-based Aster DM Healthcare and Hyderabad-based Care Hospitals plan to join hands next month in a marriage blessed by private equity giant Blackstone, two people aware of the matter said.

While Aster DM promoter Azad Moopen will be executive chairman of the new entity which may be called Aster DM Quality Care Pvt. Ltd, a working group of professionals from both companies will run what will be India’s third-largest hospital chain, the people said.

The deal marks the growing healthcare ambitions of Blackstone, which owns large stakes in both companies. Once the merger closes, the new entity will have close to 9,900 beds, just behind Apollo Hospitals Enterprises and Manipal Health Enterprises.

Due diligence

Aster DM and Quality Care have signed a term sheet for the merger and due diligence is under way, the people cited above said on the condition of anonymity. The two companies have arrived at a share swap ratio of 50:50, though a definitive agreement is yet to be signed, thepeoplesaid.

Spokespersons of TPG, Blackstone and Aster DM declined to comment.

Publicly listed Aster DM Healthcare, which had a market value of $2.27 billion at the close of Friday’s trading, may be valued at a premium to its current market cap, while Quality Care, which also owns KIMS Hospitals apart from its India and Bangladesh assets, is likely to be valued over $2 billion, one of the two people cited above said. One of the sticking points is the nature of the discount that Quality Care might take or the kind of premium that Aster DM might need to be assigned.

The Moopen family that owns around 42% of Aster DM will continue to own a lower stake in the combined entity, along with Blackstone, TPG and some other investors. An open offer is likely to be launched after the merger is announced. The merger will allow Care Hospitals operator Quality Care Pvt. Ltd to become a listed entity through Aster DM, satisfying a key goal of Care shareholders.

VCCircle first reported on July 22 that Quality Care and Aster DM Healthcare were in talks to merge.

Moopen family to stay on

Multiple routes to the merger are being discussed, the people cited above said. One path could see both Aster DM Healthcare and Quality Care acquiring 5% stake in each other’s entities.

The larger transaction is a merger, the people cited above said. “Eventually, it will be a stock swap, which will be filed with the National Company Law Tribunal,” the second person said.

Mint first reported on 11 December 2023 that Blackstone and TPG-backed Quality Care had submitted a non-binding bid to merge with Aster DM Healthcare. Other private equity investors had also presented their own proposals. The Care proposal pitched a merger in a partnership model at the time, as the Moopen family wished to stay invested in the hospital business, Mint reported at the time.

“The Moopens are not exiting,” the first person cited above said, who added that there was no cash deal currently being considered.

Complex merger

The complications in this deal are a consequence of multiple entities that need to be combined to the satisfaction of all shareholders. Blackstone holds a 74% stake in Quality Care, which runs Care Hospitals. That transaction saw TPG rolling over its 26% stake from its previous investment in Quality Care, from Evercare Healthcare Fund onto Quality Care. Quality Care, in turn, acquired an 83-86% stake in Kerala-based KIMS Hospital. Blackstone invested over $1 billion as it accumulated stakes in both entities, Mint reported at the time. Quality Care and KIMS together own over 5,000 beds between them. At the end of June quarter, Aster DM has 4,869 beds, adding up to around 9869 beds.

“Backed by a planned 35% bed capacity addition of around 1700 beds over FY24-FY27E and improving margins across maturity profiles, the company stays on track to deliver a robust 19% sales CAGR and 25% Ebitda CAGR over FY24-27E,” a Kotak Institutional Equities research report on 1 August said.

Besides Temasek Holdings, which holds a majority stake in Manipal Hospitals, several PE firms have acquired large stakes in hospital chains, triggering a spate of consolidation in the Indian healthcare space. Pension fund OTPP acquired a majority stake in Pune-based Sahyadri Hospitals in 2022. KKR, which exited Max Healthcare in 2022, with the highest return from India, recently moved to acquire Kerala-based Baby Memorial Hospital.

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