Actis to sell stake in Sterling Hospitals

After making four-fold profit by selling its stake in Paras Pharma in one of the largest private equity (PE) exits in India, UK's Actis is looking for another big payday.

Six months after the Paras deal, Actis wants to exit Sterling Hospitals, a Gujarat-based multi-speciality hospital chain with six centres, according to three independent sources in the know.

JM Financial has been roped in for advice, say the sources.

Actis holds 80 per cent in Sterling. The rest is held by Girish Patel, the former promoter of Paras.

Talks are on with strategic investors and hospital chains such as Fortis and Apollo, besides international players like Parkway Hospitals which are interested in the Indian healthcare sector.

Even though talks are at an early stage with interested parties signing non-disclosure agreements, PE players with an interest in healthcare, such as Advent International, Carlyle and Apax Partners, are also likely to be approached.

Rajiv Sharma, CEO, Sterling Hospitals, said, "As a policy, we do not comment on matters related to shareholders. Hence, I would not be able to comment."

An Actis spokesperson said, "As a matter of policy, we do not comment on market speculation." Sterling Hospitals Chairman Girish Patel refused comment. There was no reply to mails sent to Fortis and Apollo till the time of going to press.

In December last year, after the Paras deal, Actis Managing Director JM Trivedi had said the fund was committed to Sterling.

"We have no plan to exit Sterling at this time," he said. Sterling has 1,027 beds in four multi-speciality tertiary care hospitals, one each in Ahmedabad, Vadodara, Rajkot and Bhavnagar.

It has secondary care hospitals in the Mundra special economic zone and Adipur.

People following the negotiations peg Sterling Hospitals' revenue at Rs 250 crore (Rs 2.5 billion) a year and an earning before interest, tax, depreciation and amortisation of Rs 25-30 crore (Rs 250-300 million).

The deal is likely to be struck at an enterprise value (EV) of Rs 450-500 crore (Rs 4.5 -5 billion), they say.

In 2006, Actis invested $15.5 million (Rs 69 crore) to buy 41 per cent in

Addlife Medical Institute, which owns Sterling Hospitals. It later raised its stake to 80 per cent.

The same year, Actis bought around 25 per cent in Paras for $45 million (Rs 202 crore). It later raised its holding to 63 per cent, with total investment touching $150 million (Rs 540 crore).

Four years later, in 2010, it sold its entire stake for $726 million (Rs 2,100 crore). Before this, Sterling Addlife was demerged from Paras Pharma.

A PE investor in the healthcare sector said Sterling was a rare opportunity as the hospital space in India was fragmented.

"An established hospital chain will provide an opportunity to expand throughout India," he said.

Navroz Mahudawala, managing director of Candle Partners, a boutique advisory firm, said pan-Indian players were not doing very well in Gujarat.

"It's a market where local players are strong. Even the local chains have single-city operations. The national players came late, in 2006-07, and so it has been difficult for them. Sterling is the only one with some size and so there should be considerable interest in it," he said.

For the buyer, a presence in Gujarat will mean access to a high-growth market. Apollo has a nominal presence in the state. But Wockhardt has a sizeable market share with hospitals in Rajkot, Surat and Bhavnagar.

Consolidation in the industry is important as these two players are now achieving critical size.

Both Apollo & Fortis have 8,500-plus beds and run more than 55 hospitals throughout the country.

The shares of Apollo & Fortis trade at 13-14 times EV/EBITDA of 2011-12. Since the buyer of Actis' stake will get strategic control, many suitors will be tempted to offer 18-20 times Sterling's FY12 EV/EBITDA, say those tracking the development.

The private hospital segment is estimated to reach $54 billion by 2014 by growing at a compounded annual growth rate of 20 per cent as against the present level of $26 billion, according to a recent study by the Associated Chambers of Commerce and Industry of India.

A study by Ernst & Young says India will need another 1.75 million beds by the end of 2025.

At present, India has one hospital bed per 1,000 people, as against the global average of four beds per 1,000 people.