Fortis Healthcare to Acquire 31% Stake in Agilus Diagnostics for INR 1,780 Cr

Fortis has already received a formal letter from NJBIF, which holds a 15.86% stake in Agilus, valuing its share at INR 905 Cr.

Fortis Healthcare is set to acquire a 31% stake in its diagnostic arm, Agilus Diagnostics, for INR 1,780 Cr, valuing the company at INR 5,700 Cr.

The stake is being sold by private equity (PE) players through the exercise of a put option, marking a significant move in Fortis’s strategy to consolidate its position in the diagnostics sector.

The acquisition involves PE investors, including NYLIM Jacob Ballas India Fund III LLC (NJBIF), International Finance Corporation (IFC), and Resurgence PE Investments Limited (formerly known as Avigo PE Investments Limited).

Fortis has already received a formal letter from NJBIF, which holds a 15.86% stake in Agilus, valuing its share at INR 905 Cr. The remaining PE investors are expected to exercise their put options by August 13, 2024.

The deal values Agilus at 20 times its expected FY26 enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio.

Nuvama analysts have noted that the acquisition will be primarily funded by debt, amounting to INR 1,500 Cr at an interest rate of 10-10.5%, potentially putting pressure on Fortis’s margins.

Agilus’s Financial Performance

Agilus Diagnostics has shown solid financial performance, with net revenues of INR 309.6 Cr in Q1 FY25 and an EBITDA of INR 55.5 Cr, reflecting a margin of 18%.

Despite this, the company faces significant competition in the Indian diagnostics industry. As of August 8, 2024, India’s largest diagnostic player, Dr Lal PathLabs, has a market capitalization of INR 26,669.89 Cr, with revenues of INR 534 Cr in Q1 FY25.

Another major player, Metropolis Healthcare, has a market cap of INR 10,575.16 Cr and posted revenues of INR 292.27 Cr in Q4 FY24 and INR 1,103.43 Cr for FY24.

Strategic Considerations

Fortis Healthcare, in a stock exchange notification, confirmed the receipt of NJBIF’s letter on August 7, 2024, regarding the exercise of the put option for its 12.43 million equity shares, equivalent to a 15.86% stake in Agilus Diagnostics, valued at INR 905 Cr.

Fortis stated that it is in the process of assessing the situation and will take the necessary steps to comply with its contractual obligations under the shareholders’ agreement, subject to applicable laws.

The three PE investors had exit rights related to their shareholding in Agilus, including the right to exit through the exercise of the put option by August 13, 2024, at fair market value as per the shareholders’ agreement dated June 12, 2012.

Future Prospects

This development follows earlier efforts by Malaysia’s IHH Healthcare, which holds a controlling stake in Fortis Healthcare, to facilitate the PE investors' stake sale.

IHH Healthcare had mandated bankers to find a buyer for the stake, but the process ultimately led to Fortis’s decision to acquire the stake directly.

Agilus Diagnostics, formerly known as SRL, had also filed a Draft Red Herring Prospectus (DRHP) with SEBI in September 2023, planning an initial public offering (IPO).

The IPO was to comprise an offer for sale (OFS) of 14.2 million equity shares by the investors, but the plans were shelved in February 2024.

Nuvama analysts commented that Fortis management’s commitment to continuing its hospital expansion is reassuring. They also see potential value-unlocking opportunities through Agilus’s recovery.

However, Agilus is still navigating challenges from its recent rebranding efforts. The rebranding, which cost INR 9 Cr in Q1 FY25, is expected to total INR 50 Cr for the entire fiscal year.

The brokerage added that while rebranding and regulatory issues have slowed Agilus’s growth, they anticipate the business to reach industry-level growth by FY26, projecting a revenue and EBITDA compound annual growth rate (CAGR) of 8% and 17%, respectively, from FY24 to FY27.