Mumbai: Devi Shetty-led Narayana Hrudayalaya (rebranded Narayana Health) is in discussions with key shareholders of Spire Healthcare Group Plc to acquire a controlling stake in UK’s largest private player in revenue in the segment, said people aware of the matter. This comes as the UK is seeing a record boom in private healthcare on the back of serpentine National Health Service (NHS) waiting lists. If successful, this will mark the Indian medical group’s second global foray after the Cayman Islands.
Spire Healthcare runs 40 hospitals and more than 50 clinics across the UK and is a FTSE 250-listed company. The market value of the widely held company was $1.12 billion (£884.4 million) at market close on Thursday. The senior leadership of Narayana has already initiated detailed negotiations with large institutional shareholders and is said to have received positive feedback. Shetty, a renowned heart surgeon-turned-healthcare billionaire, and his team are expected to meet some activist shareholders and others next month to drum up support for the bid.
Bengaluru-based Narayana, with a market capitalisation of 25,524.66 crore, is already working with advisers to build a strategy to win over shareholders. It has also sounded out global banks and financial institutions for $500-600 million in funding. Shetty and his family members, along with promoter group entities, own 63.85% of the 24-year-old company. The plan is to take control of at least 51% of Spire by launching an open offer, said the people cited. If Narayana manages to take this up to around 75%, it may even consider taking the company private, they said.
Limited Free Float
However, there is no guarantee that discussions will lead to a successful outcome as past efforts to acquire Spire have failed.
Nearly half of Spire Group—49.21%—is held by its top institutional holders and this has made the company a periodic takeover target amid a global wave of consolidation efforts. These financial investors include hedge fund managers Toscafund Asset Management and Dimensional Advisors, asset management companies like FIL Investment Advisors, M&G Investment Management, Schroder Plc, Vanguard Group Inc, Blackrock, HSBC Holdings, Insurers Legal & General and banks such as Norges Bank among others.
Cape Town-headquartered Mediclinic Group has a minority 29.7% ownership in Spire, which it classifies as “an investment,” making it the single largest shareholder. Mediclinic is a diversified international private healthcare services group established in 1983 and operational in South Africa with divisions in Switzerland, Namibia and West Asia.
The top four shareholders cumulatively own 62% of the shares. This in turn has kept the stock largely flat on account of the low free float. Spire shares have got derated and trade at a discount to peers despite clocking better ebitda CAGR of 14%. Earlier this week, Spire completed a small share buyback programme.
In October 2017, Mediclinic made a cash-and-share offer to acquire the remaining 70.1% in Spire for approximately £1.3 billion. The UK chain’s board rejected this as well as a revised offer, saying they undervalued the company and its prospects. Three years later, efforts to put together a £1.4 billion merger between Spire and Australia-listed rival Ramsay Healthcare, two of Britain’s biggest private hospital operators, also collapsed. Spire shareholders led by Toscafund rejected the “undervalued” 250p-a-share deal. Interestingly, Spire’s management had agreed to be taken over by Ramsay.
In 2022, Mediclinic itself received a £3.4 billion cash offer from a consortium of its biggest shareholder and a shipping group. An improved £3.7 billion offer was subsequently accepted. Remgro, which owns almost 45% of Mediclinic, and Mediterranean Shipping Company, the world’s largest container shipping group, completed the transaction last May.
Narayana, Spire and Mediclinic didn’t respond to queries, and neither did Devi Shetty, chairman of Narayana Health.
“Due to Mediclinic-backed Ramsay’s failed 250p bid, there is a perception that with the shares still below that level, Mediclinic is a seller,” said Seb Jantet, an analyst with Liberum.
Spire’s management said on a call recently that Mediclinic is supportive of its strategy and “haven’t been selling shares and don’t plan to sell shares”.
In the past, the independent UK chain has faced regulatory issues and had to pay £1.2 million in fines to the Competition and Markets Authority for illegal price-fixing agreements on consultancy fees. CEO Justin Ash’s pay packet and approximately £2.3 million share options—awarded at the height of the pandemic—have also raised shareholder eyebrows. Any takeover logically would lead to a big payday for him.
Ash has turned around the group with revenue rising 11.8% and pre-tax profit up 12.7% in the first half of this year as the NHS outsources more work to private healthcare providers. The company is expecting underlying annual profits at £255-275 million this year, after notching up £130.6 million in the first half. Its work for the NHS accounted for a quarter of revenue.
“The hospital division is well placed to deliver growth and set out the growth potential for the nascent services business,” Jantet said. “But we don’t think Spire can get to its FY26E hospitals ebitda margin target without cost savings.
Cautious Player
Narayana has found it hard to strike deals within India over the last decade as PE players have ramped up scale through M&As for lofty valuations. On an earnings call with investors on November 5, Viren Shetty, vice chairman, Narayana Health, said group hospitals do not make a lot of sense for the company.
“One is that it’s fully priced in and there isn’t too much delta available for us to be able to make a lot of sense of the acquisition.” However, he added that the group is still constantly evaluating prospects. “Things are still in discussion both here as well as overseas. We are looking at certain O&Ms (operations and maintenance) and asset-light opportunities.”
For FY2024, Narayana Hrudayalaya posted total income of Rs 5018 crore. Its net profit surged 30%, up at Rs 789 crore. Data from Ace Equity shows for the company had cash and bank balance of Rs 416 crore and a free cash flow of Rs 45.69 crore at end end of FY24. Its debt-to-equity stood at 0.50, which experts believe gives it ample headroom to go for a reasonably sized deal without straining its balance sheet.
Analysts at Anand Rathi acknowledge the near-term hiccups. “The company’s position is solidified by the higher maturity mix in hospitals, steady performance of its flagship hospitals in India and better profitability of new hospitals,” their note from earlier this month said, adding, “going ahead, prioritizing debottlenecking and brownfield expansion at its centers and Cayman Islands’ expansion would boost growth. However, operationalizing new hospitals, which would account for most of its future growth, could pose a risk to margins.”
