Aster DM & Care Hospitals' Merge to Form Aster DM Quality Care

Azad Moopen, the founder of Aster DM Healthcare, is expected to assume the role of Executive Chairman.

Aster DM Healthcare and Care Hospitals are reportedly on the verge of a strategic merger that promises to reshape the Indian healthcare landscape.

The potential merger, which analysts are watching closely, is expected to create a formidable healthcare conglomerate, enhancing the reach and capabilities of both organizations.

If completed, this merger will be one of the most significant developments in the Indian healthcare sector in recent years.

Deal Structure

According to sources familiar with the matter, the merger will lead to the creation of a new entity, likely to be named Aster DM Quality Care.

The transaction is expected to be structured as a share swap, with an anticipated 50:50 ratio, meaning an equal exchange of shares between Aster DM Healthcare and Care Hospitals. This deal will be filed with the National Company Law Tribunal for approval.

The new entity will benefit from an extensive network of hospitals, clinics, and healthcare facilities, significantly broadening its geographical footprint and expanding its service offerings.

Aster DM Healthcare, currently valued at approximately INR 19,068 Cr ($2.27 billion), is expected to be valued at a premium due to its strong market position and growth prospects. Care Hospitals, valued at over INR 16,800 Cr ($2 billion), will contribute additional value to the merged entity.

Post-merger, an open offer is likely to follow in compliance with regulatory requirements. Azad Moopen, the founder of Aster DM Healthcare, is expected to assume the role of Executive Chairman, with a joint management team overseeing the merged operations.

Aster DM Healthcare has refrained from commenting on market speculation.

Challenges in the Merger

However, the merger is not without its challenges. Care Hospitals is currently primarily owned by Blackstone, a private equity firm that acquired a majority stake from TPG Rise funds in May 2023.

Public-Private Partnerships (PPPs) and other collaborations will continue to play a crucial role in the merged entity’s strategy.

Despite these challenges, the merger is expected to enable the new entity to enhance its investment in infrastructure, technology, and talent, leading to improved patient care and outcomes.

The Moopen family is set to remain invested in the hospital business, although the complexities of integrating multiple entities remain a significant hurdle.

Blackstone, which holds a 74% stake in Quality Care, and TPG, with a 26% stake, will be involved in the transaction. The merger discussions also include various routes, such as a potential 5% stake acquisition in each other’s entities.

Aster DM Healthcare's Performance & Future Outlook

In the last fiscal year, Aster DM Healthcare strategically separated its Gulf Cooperation Council (GCC) business, unlocking significant value for its shareholders.

The company announced a special dividend of INR 9,912 per share and retained INR 3,360 per share to support its expansion efforts in India.

Aster DM Healthcare plans to enhance its Indian operations by adding approximately 1,700 beds, representing over a 30% increase, by the fiscal year 2027.

A major focus will be on Kerala, where Aster operates with over 80% occupancy and achieves a margin of around 22%.

The company is also working to regain government business in the Andhra Pradesh-Telangana cluster, though short-term margin improvements are not expected, according to a recent report from J M Financial.

However, Aster DM Healthcare faces several challenges, particularly with its Aster Labs, Aster Pharmacies, and Operations and Maintenance (O&M) hospitals, which have pressured its margins.

The introduction of small-scale O&M Asset Light hospitals aims to improve Return on Capital Employed (ROCE), although this initiative is still in the early stages.

Additionally, the anticipated retirement of Dr Azad Moopen in 3-5 years introduces uncertainty regarding the future governance of GCC operations.

Despite these challenges, Aster’s stock price increased by approximately 23% over the past year, buoyed by a substantial INR 10,080 dividend, which yields 40%. The strong performance has led to a re-rating of its India business from 15 times to 20 times EV/EBITDA.

The financial outlook for Aster's Indian operations remains positive, with projected revenue and EBITDA compound annual growth rates (CAGRs) of 16% and 21% respectively, over the fiscal years 2024 to 2027.

However, concerns about margins, ROCE, and a net debt of INR 1,064 Cr, which is 2.2 times EBITDA, persist. While margins have improved in the Maharashtra and Karnataka clusters, the Andhra Pradesh-Telangana region requires a strategic focus to regain government business.

Aster Labs and Pharmacies are anticipated to break even by the late fiscal year 2024 and fiscal year 2026, respectively, with small-scale O&M hospitals approaching breakeven and showing promising growth projections.