Fortis Healthcare board approves demerger of its diagnostics arm

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New Delhi: Fortis Healthcare Ltd, a Gurgaon-based healthcare company, on Friday said its board of directors had approved the demerger of its diagnostics arm, including the business unit at subsidiary SRL Ltd, into a fully-owned unit Fortis Malar Hospitals Ltd.

The move will separate the company’s diagnostic and healthcare businesses and unlock value for shareholders, said Malvinder Singh, executive chairman, Fortis Healthcare.

Fortis Healthcare and Fortis Malar are listed entities, and the idea is to consolidate all the hospital businesses under former and move the diagnostics business to the latter, subject to statutory and regulatory approvals. The hospitals and the diagnostics businesses operate on different models and each has strong growth opportunities.

“The demerger shall be followed by SRL being merged with Fortis Malar as an integral part of the same composite scheme,” the company said in a stock exchange filing.

Fortis Malar operates a hospital facility in Chennai and is listed on BSE.

Prior to the merger, the hospital business of Fortis Malar will be sold to Fortis Healthcare by way of a slump sale for a cash consideration under the composite scheme, the company said.

Once the composite scheme becomes effective, the diagnostics business of Fortis Healthcare, including that housed in SRL would be vested in Fortis Malar. Fortis Malar will subsequently be renamed SRL Ltd and this company will be listed on NSE, in addition to its current listing on BSE, the company said.

Close to 15% of SRL’s net sales comes from Fortis Healthcare, the company said in an investors call.

Fortis Malar would allot 0.98 fully paid up equity shares of Rs.10 each for every Rs.10 equity share held in Fortis Healthcare.

The equity shareholders of SRL (except for Fortis Malar, who will acquire shares of SRL pursuant to the demerger) will be issued and allotted 10.8 equity shares of Rs.10 each of Fortis Malar for every equity share of Rs.10 each held by them in SRL as on record date. Fortis Healthcare shall pay Rs.43 crore as lump sum consideration to Fortis Malar towards acquisition of its hospital business.

According to Singh, the move will unlock immense value for all shareholders.

“As a result of the new synergistic groupings, both the hospitals and diagnostic businesses will benefit from greater clarity, a stronger focus and an independent growth trajectory. Equally, this will enable the accelerated pursuit of their respective business goals while empowering them to reach their fullest potential,” Singh said.

The promoters of Fortis Healthcare own a fully diluted stake of 63.1% in the company with the rest being held by public shareholders.

Fortis Healthcare also owns 56.4% in SRL and 62.4% in Fortis Malar.

“The new entity’s share would be priced at around Rs.65-70 considering the current levels while the new entity’s valuation will be approximately Rs.5,000-6,000 crore. In reality, the deal does not particularly benefit investors or shareholders,” a Mumbai-based pharma analyst said, requesting anonymity.

The company during the analyst call said that the true value of the new entity will be decided by the market.

“You can look around what has been happening and keep in mind our position in the market. Net of that will be a fantastic return for the shareholders,” said Bhavdeep Singh, chief executive officer, Fortis Healthcare.

“Whatever will happen will happen when Malar becomes the new SRL. You will get to know about that then,” Singh said without disclosing further details, in response to a question on what the valuation of the new entity would be.

Fortis Healthcare’s board on 4 August, in a move aimed to provide an exit route to private equity investors, had approved the demerger of its diagnostic business SRL Ltd. The private equity investors together owned 34% stake in the company.

“A restructuring committee will work on demerger structure, including valuation and share entitlement ratio, and submit the proposal to the board on 19 August,” Fortis Healthcare said in the statement.

Shares of Fortis Healthcare fell 3.27% to Rs.187.80 apiece on BSE while the benchmark Sensex lost 0.17% to 28,077 points.