India Inc. has already seen its fair share of large mergers and acquisitions (M&A) in 2018, and just before the year draws to a close, the announcement of yet another transaction, while adding to the tally, reinforces the belief that the Indian healthcare sector is ripe for consolidation.

Radiant Life Care, a hospital management company promoted by Abhay Soi and backed by global investment firm KKR and Co., announced on Monday that it, along with KKR, would be acquiring a majority stake in Max Healthcare Institute from Max India, promoted by Delhi-based industrialist Analjit Singh. Through a series of transactions, KKR will end up with a 51.9% stake in Max Healthcare; Abhay Soi will own 23.2%; the promoters of Max India, led by Analjit Singh, will hold 7%; while the remaining shareholding will be with the public and other shareholders.

The transactions, which will also include Radiant Life Care merging with Max Healthcare, will lead to the creation of a healthcare company that operates 16 hospitals with 3,200 beds across the country. The new entity will have an equity valuation of ₹7,242 crore and will be among the top three in the country by revenue and the fourth largest in terms of operating beds.

In September 2018, Radiant had agreed to buy a 49.7% stake in Max Healthcare from South African healthcare company Life Healthcare Group Holdings for around ₹2,120 crore. Max India and Life Healthcare had been running Max Healthcare as a joint venture, before the latter expressed its keenness to exit its Indian investment to focus on its home market.

Analysts predicted then that this could be the first step towards a larger merger between Radiant and Max Healthcare, and lead to Radiant’s indirect listing. Radiant commenced operations in 2010 and has some large hospitals in its portfolio such as the BLK Super Specialty Hospital in Delhi and the Nanavati Hospital in Mumbai. KKR acquired a 49% stake in Radiant for $200 million in 2017.

Prior to the merger between Radiant and Max Healthcare, it is expected that Max India will demerge its non-healthcare businesses (Max Bupa Health Insurance and Antara Senior Living) into a new wholly-owned subsidiary of Max India, which would be later listed. Shareholders of Max India would receive one share of ₹10 each in this company in lieu of every five shares of ₹2 held in the existing Max India.

Following this, Radiant’s healthcare assets will be demerged into Max Healthcare, which will then undertake a reverse demerger with Max India to create the merged Max Healthcare, which would be a larger entity than what it is at present (with Radiant’s assets as well). As a result of this reverse merger, Max India shareholders will get 99 shares of ₹10 each for every 100 shares of ₹2 that they hold in the current, smaller Max India. Post this, Max India would be dissolved without winding up, and equity shares of the merged entity will be listed on the bourses. Abhay Soi will be the chairman of this new entity. KKR will also acquire an additional stake of 4.99% in this entity from the Max promoters, who would eventually be declassified as promoters. The merged entity will continue to use the Max Healthcare brand name.

The transaction would help create value for shareholders by creating a large, pure-play healthcare company that does away with the holding company discount, which Max’s healthcare businesses suffered from when it was a part of the same company (Max India) that also housed the health insurance and senior living businesses, Sanjay Nayar, CEO of KKR India, told CNBC-TV18 during a telephonic interview on Monday. The deal, which is contingent on several regulatory approvals coming through, could take anywhere between eight months to a year to close, he added.

Nayar added that the healthcare sector was poised to grow in India due to the government’s focus on allowing Indians, from all sections of society, access to quality and affordable healthcare. “The private sector is stepping up capital (allocation) to the healthcare sector and there could be more consolidation ahead for healthcare in India,” Nayar said.

The Radiant-KKR combine had also put in a bid to acquire a stake in the Fortis Healthcare, but eventually lost out to Malaysia’s IHH Healthcare Berhard. However, the deal for Fortis isn’t done yet, with the Supreme Court asking parties concerned to maintain a status quo with respect to the sale of Fortis, pending a contempt plea filed by Japanese drugmaker Daiichi-Sankyo against the Fortis promoters, Shivinder Singh and Malvinder Singh.

One thing is certain: the $6-billion healthcare market in India is bound to see greater M&A activity in 2019, with deep-pocketed players like IHH, KKR, Radiant and Ranjan Pai-led Manipal Group on the hunt for suitable assets; and several hospital owners eager to sell owing to rising cost and regulatory hurdles.

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