September 14, 2007

Acquisition bug bites Health care Industry

Firms are opting for acquisitions over new projects as operational hospitals mean immediate revenue at lower costs.

For an industry that is moving faster than fire in a vineyard, having to wait for more than five years just to get a green field project going can be rather frustrating.

But increasingly now, in the healthcare industry, numerous hospital chains — in attempts to clamp down on their waiting periods, boost cash flow and expand into other parts of the country — are on the prowl for strategic acquisitions of other hospitals.

Fortis Healthcare’s 46 per cent acquisition of Chennai’s famous Malar Hospitals last week was the second such acquisition for the north Indian hospital chain and also marked its first step into the south.

Previously, in 2005, Fortis had acquired 90 per cent in the Escorts Heart Institute in Delhi along with three other Escort hospitals in Amritsar, Faridabad, and Chhattisgarh and a vacant plot marked for an Escorts hospital at Jaipur for more than Rs 600 crore.

Towards the end of 2005, Apollo Hospitals acquired 51 per cent stake in Bangalore’s Imperial Cancer Centre and Multi-Specialty Hospital for Rs 35 crore, having already acquired Gleneagles Hospital in Kolkata, Sagar Hospital in Mysore and hospitals in Kakinada, Chennai and Madurai.

Today, roughly 5-6 per cent of Fortis Healthcare’s entire revenue comes from Escorts alone. The acquisition that put the company on a financial backfoot that will only break next year, in retrospect, worked brilliantly for Fortis.

Says Shivinder Mohan Singh, chairman and managing director, Fortis Healthcare, “The Escorts acquisition has been a big boon for us. In fact, it encouraged us to take the acquisition root for gaining a pan India presence.”

Manipal Health Systems, in May this year, grew its acquisitions portfolio by acquiring the 130-bed Providence Hospital in Salem, Tamil Nadu. The company already had a hospital through the same route in Visakhapatnam.

R Basil, managing director and CEO, Manipal Health Systems, explains, “Acquisitions of running hospitals help us in immediately ramping up our revenue at lower investment costs. You will never be able to generate such quick returns from a green field project.”

It was probably this advantage that closed the acquisition of Chennai’s Sankara Hospital by Hyderabad-based Global Hospitals for Rs 257 crore earlier this year.

Acquisitions may be ideal strategies for large hospital chains to expand their portfolio, but for the acquired entity, they are often a means of rising above debts, loans and financial crunches.

Sankara Hospital, for instance, established by the Sri Kanchi Kamakoti Peetam Charitable Trust was put on the block last year after the Trust approached the Madras High Court seeking permission to sell the property because it could not run the hospital and it had become heavily indebted.

And one’s escape turns out to be another’s profit. With private hospitals filling moneybags with crores, the idea of adding a new facility at a much lower investment is appealing.

S K Venkataraman, chief financial officer, Apollo Hospitals, explains, “Normally, if the owner of an operational hospital wants to make an exit from the entity, he invites bidders. The party that wins the bid and acquires the hospital gets the benefit of immediate cash flows. The only thing left to do then is to reconfigure the hospital according to the acquirer’s needs and guidelines.”

Despite this, most chains like Apollo and Fortis like to ride on the existing brand value of the hospital they acquire. Singh, for example, has not only stuck to the Escorts brand name, according to him, any new cardiac-centric specialty set up by Fortis will also most likely be marketed under the Escorts brand.

With plans of having 40 hospitals by 2010, Singh’s strategy is simple — construct a third, manage a third and acquire the rest to reach the target. For Basil too, the takeover strategy is based on requirement and could be a path taken to make their footprints in Mumbai, Delhi, Kolkata, Chennai or Hyderabad.

However, like every strategy, there are pitfalls to this too. With just about two per cent of the country’s hospitals being more than 250-bed facilities, there aren’t enough opportunities for takeover giants.

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