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Business News/ Companies / News/  Private equity investors revise plans for stake sale in SRL Diagnostics
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Private equity investors revise plans for stake sale in SRL Diagnostics

Stake sale talks had failed earlier because PE funds weren't keen on a minority holding, promoters were unwilling to cede control

Photo: BloombergPremium
Photo: Bloomberg

Mumbai: Private equity investors in SRL Diagnostics, India’s largest diagnostic chain, have revised their plans to sell their combined 34% stake in the company to a large private equity fund, according to two people familiar with the development.

“Instead of selling their 34% stake together, each investor will start looking for secondary transactions, selling their stake to another PE fund," said one of the two people, both of whom declined to be named.

International Finance Corp. (IFC), NYLIM Jacob Ballas and Avigo Capital Partners had put their 34% stake in SRL on the block last year and were in talks with buyout funds such as KKR & Co., Warburg Pincus Llc and Baring Private Equity Asia, Mint reported in January. However, talks failed as the funds were not keen on buying a min-ority stake and the promoters were unwilling to cede control.

“Existing PEs held discussions with several buyout funds. While all of them are keen on picking up a controlling stake in SRL Diagnostics, the promoters did not want to cede control as that would have impacted the valuation of Fortis Healthcare," said the second of the two people cited earlier.

Mails sent on Friday to spokespersons for KKR, Warburg Pincus, SRL Diagnostics, Avigo Capital, IFC and Jacob Ballas did not elicit any response. A spokesperson for Baring Asia declined to comment.

Fortis Healthcare Ltd, controlled by brothers Malvinder Singh and Shivinder Singh, holds about 57% in SRL Diagnostics. Across India, SRL Diagnostics had 11 reference laboratories and 273 network laboratories, with over 6,700 collection points, as of 31 May 2015.

The second person cited earlier said that other options such as initial public offering (IPO) or a buyback by promoters could be discussed as well. An IPO, though, is not likely in the near term, the person said.

Apart from the issue of controlling stake, the valuations being sought were also on the higher side, which made it tough to close the deal, said a third person, who also declined to be identified.

“The 4,000 crore valuation of SRL Diagnostics quoted by investors is pretty high and we do not want to pursue the deal," said this person, a fund manager who held initial discussions with private equity investors.

Investors in SRL Diagnostics were looking for a valuation of 20-22 times Ebitda (earnings before interest tax depreciation and amortization), Mint had reported in January.

In 2011, Avigo Capital Partners picked up 9.27% in SRL for 100 crore which valued the company at about 1,000 crore then. In 2012, NYLIM Jacob Ballas India and IFC invested 250 crore and 120 crore, respectively, in SRL. In September, Sabre Partners, another investor, sold its minority stake in SRL to Fortis Healthcare for 105 crore, in a deal valuing the company at 3,395 crore.

SRL competes with diagnostics chains such as Dr Lal PathLabs Ltd, Thyrocare Technologies Ltd, Metropolis Healthcare and Apollo Clinic. The successful IPOs of some of these diagnostic chains have triggered an increase in the valuation of similar companies.

Dr Lal Pathlabs, which offered shares in its IPO at 550 per share, listed at a 31% premium at 720 in December. Private equity funds WestBridge Capital and TA Associates had partly exited their investments in the company through the IPO.

The 480 crore IPO of Thyrocare, another competitor of SRL Diagnostics, was oversubscribed 75 times and the shares listed on 9 May at 665 on the NSE—a 49% premium to the issue price of 446.

The industry is expected to grow at a compound annual growth rate of 16-17% to reach 60,100 crore by fiscal year 2018, according to ratings company Crisil. Stand-alone diagnostic centres hold about 48% of the market.

“The success of Dr Lal Pathlabs and Thyrocare IPOs have in particular made some of the other diagnostic businesses re-evaluate their fund raise plans both with respect to pricing and timing," said Sanjeev Krishan, partner and leader for private equity and transaction services practice at PricewaterhouseCoopers. “While timing is important, asset quality and deal construct will determine the success of the fund-raise when it happens."

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Published: 25 May 2016, 01:27 AM IST
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