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Life Healthcare group to acquire a 26% stake in Max Healthcare
News
Max India announced last week that Life Healthcare group, South Africa's
second-largest hospital chain, is acquiring a 26% stake in Max Healthcare
(MHC) for Rs 5.165bn in an all cash transaction. As part of the deal, MHC
will issue 100mn in equity after obtaining regulatory approval (which it
expects in Dec.). This would dilute Max India’s stake in MHC to about 70%.
The price for the 26% stake implies a value for MHC of Rs19.9bn or Rs50.4
per share. This is much higher than the buyback announced in June 2011
from Warburg Pincus at Rs29.4/share; with the premium reflecting good
long-term growth potential in the Indian healthcare sector, in our view.
Analysis
The company has stated the proceeds of the deal will be used to help MHC
fund its expansion and reduce its debt from the current Rs10bn to Rs8bn:
(1) MHC will redeem its preference shares from Max India of Rs1.57 bn, (2)
MHC will retain Rs1.5bn of the proceeds to fund expansion, allowing it to
cancel its proposed right issue and (3) MHC will keep the remaining
Rs2.1bn as a contingency reserve in case IFC Washington were to decide to
exercise its put option on OCP (optionally convertible prefs) of Rs2.5bn that
is valid until 2015.
Implications
MHC management indicated it is targeting a steady-state EBITDA margin of
20-25%. This appears aggressive in our view, when compared with more
mature companies in the hospitals space — such as Apollo Hospitals
(APLH.BO) which currently generates 15%-16% EBITDA margins and MHC’s
own hospitals at between 10%-15%. We would wait for the company to
better execute on key operating metrics before giving them the benefit of
higher terminal margins. We retain our Neutral rating and 12-month SOTP
based target price of Rs190. Our SOTP valuation for Max India would
increase to Rs232 if we assumed a value for MHC based on the Life
Healthcare transaction price. Key risks to our target price: Upside: Better
cost ratios, higher volumes; Downside: Tight regulations on traditional
policies, lower persistency impacting margins.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Life Healthcare group to acquire a 26% stake in Max Healthcare
News
Max India announced last week that Life Healthcare group, South Africa's
second-largest hospital chain, is acquiring a 26% stake in Max Healthcare
(MHC) for Rs 5.165bn in an all cash transaction. As part of the deal, MHC
will issue 100mn in equity after obtaining regulatory approval (which it
expects in Dec.). This would dilute Max India’s stake in MHC to about 70%.
The price for the 26% stake implies a value for MHC of Rs19.9bn or Rs50.4
per share. This is much higher than the buyback announced in June 2011
from Warburg Pincus at Rs29.4/share; with the premium reflecting good
long-term growth potential in the Indian healthcare sector, in our view.
Analysis
The company has stated the proceeds of the deal will be used to help MHC
fund its expansion and reduce its debt from the current Rs10bn to Rs8bn:
(1) MHC will redeem its preference shares from Max India of Rs1.57 bn, (2)
MHC will retain Rs1.5bn of the proceeds to fund expansion, allowing it to
cancel its proposed right issue and (3) MHC will keep the remaining
Rs2.1bn as a contingency reserve in case IFC Washington were to decide to
exercise its put option on OCP (optionally convertible prefs) of Rs2.5bn that
is valid until 2015.
Implications
MHC management indicated it is targeting a steady-state EBITDA margin of
20-25%. This appears aggressive in our view, when compared with more
mature companies in the hospitals space — such as Apollo Hospitals
(APLH.BO) which currently generates 15%-16% EBITDA margins and MHC’s
own hospitals at between 10%-15%. We would wait for the company to
better execute on key operating metrics before giving them the benefit of
higher terminal margins. We retain our Neutral rating and 12-month SOTP
based target price of Rs190. Our SOTP valuation for Max India would
increase to Rs232 if we assumed a value for MHC based on the Life
Healthcare transaction price. Key risks to our target price: Upside: Better
cost ratios, higher volumes; Downside: Tight regulations on traditional
policies, lower persistency impacting margins.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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