MUMBAI: Despite the stress on performance due to regulatory restrictions, the value of merger and acquisition (M&A) deals in hospital sector jumped by record 155 percent at ?7,615 crore in FY19, a report said Monday.
The total value of M&A transactions in the hospital sector in FY19 recorded an increase of 155 percent amounting to ?7,615 crore, the highest value in the sector in over five year, as against transactions worth ?2,991 crore done in FY18, according to rating agency Icra.
Two largest transactions in FY19 were the acquisition of stakes Fortis Healthcare for around ?4,000 crore and Max Healthcare for ?2,351 crore.
In both these cases, the deal has been signed at a premium to the then prevailing market price, it noted.
The acquisition of shares in Fortis Healthcare had been done at a price of ?170 per share, against the then prevailing market price of ?144 per share, noting that as this was a primary infusion, the post-money valuation stood at ?152 per share.
The agreement to acquire shares in Max Healthcare was announced with equity value of ?4,298 crore for the healthcare business against the then prevailing market value around ?2,170 crore of Max India, which also includes the health insurance business under Max Bupa Health Insurance as well as Antara Senior Living.
The premium paid reflects the healthy appetite for quality healthcare assets from the global reputed investors, despite the recent under performance of the sector, it said.
The hospital industry is capital intensive on account of high real estate and significant medical equipment costs and the private sector accounts for almost 70 percent of the healthcare spend in the country.
After witnessing years of healthy growth in revenues and profits till FY17, the sector, however, recorded diminishing returns in FY18 and FY19 due to pressure on margins, after a slew of regulatory actions, including caps on prices of oncology drugs, cardiac stents and knee implants and the advent of the GST, leading to higher indirect tax burden and restrictions placed by the governments of the National Capital Territory of Delhi, West Bengal and Karnataka.
"A majority of the deals involve acquisition of stake in multi-specialty hospitals rather than a single specialty hospital/chain and the target companies had a substantial portion of their operations in metros and tier-I cities," Icra assistant vice president Kapil Banga said.
Consolidation is a better option for the players as the gestation period for investments in hospitals is already high due to large upfront investments and the longer time needed to ramp-up the utilisation of assets.
Further, the recent regulatory actions have increased the gestation period further, thus increasing the funding requirement of the sector and necessitating consolidation, he said.