Will India become Netcare’s next footprint?

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Is South Africa’s Netcare about to take a stake in India’s CARE Hospitals? If rumours are to be believe it may well be. India’s leading business information website VVCircle says Netcare and private equity firm, Baring Private Equity Asia, have emerged as front-runners to acquire a controlling stake in the Hyderabad-based hospital chain. The chain operates 17 hospitals in nine cities across India.

US private equity firm Advent International has been looking to exit its investment in the hospital chain for several months now. In April it was said to be engaged in talks with Carlyle Group and three separate healthcare providers to sell its 72% stake for between $250 million and $300 million. Advent bought the stake in 2012 for $105 million. The remaining 28% stake is held by a group of Indian doctors.

This is not the first rumour involving Netcare to have done the rounds this year – in February it was claimed that the company had joined the race with Reliance Foundation to purchase a majority stake in Seven Hills Healthcare, and in June 2014 there was talk that Netcare was in discussions with private equity investors and promoters in Chennai-based Vasan Healthcare for a majority stake.

So is this just another rumour? While to company could not be reached for comment, if the old adage of where there’s smoke there’s fire applies, then it would appear that Netcare is out there looking to expand into India. Competitor, Life Healthcare, already has a presence in India with a 46% stake in Max Healthcare.

The company’s interim results released in May show that despite pressures on the general SA economy, private healthcare services experienced sustained demand with local growth mainly organic. Its UK business saw good growth in NHS-funded procedures but this was offset by a decline in private volume. On a P/E ratio of 21.9 it begs the question whether the results justify this demanding multiple?

Investors, frustrated by the delay in expected realisation of returns on foreign investment will be counting on management to look elsewhere and India could provide an opportunity.

In India, against a backdrop of a widening gap between demand and supply in healthcare, hospital chains have been expanding and raising more capital from PE and strategic investors. Private equity in India exploded a decade ago when global firms like Blackstone, 3i Group and Apax Partners flocked to the country, drawn by spectacular returns produced by local funds. But the industry hit a wall after the 2008 financial crisis. The sharp depreciation of the currency, and macro uncertainties tempered healthcare investments. A loss of appetite for initial public offerings, one of the most common ways for private equity firms to exit their investments, meant that for many firms an out in the usual four to five year period was not available.

More recently, however, the investment climate in India has improved. The sharp drop in oil prices has reduced India’s current-account and invigorated the stock market, clearing the way for private equity firms to exit their investments.

Interestingly, according to Bain & Co’s Global Healthcare Private Equity Report for 2015, Indian companies that have developed cost-effective models for delivering healthcare in India are starting to expand into other emerging markets.

While India remains one of the most active countries in the region, investors face high valuations. But despite this, strategic investors remain active, demonstrating continuing enthusiasm for the healthcare delivery segment in the country; the hunting ground is still large, and the potential for strong returns remains.

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