Aster DMs $2 Billion Merger Hinges On Quality Care Turning Profitable In One Year

In one of the biggest mergers and acquisitions in the healthcare space, Aster DM will acquire Blackstone and TPG-backed Quality Care, which manages Care Group of Hospitals, for over $2 billion in valuation. The merger is expected to be completed by December 2026, with Quality Care valued at a discount to Aster DM in terms of Enterprise Value to EBITDA (earnings before interest, taxes, depreciation, and amortisation) multiples, primarily because the Blackstone-backed company is currently loss-making.

Aster DM has assured investors that the merged entity will be earnings accretive which hinges on Quality Care turning profitable in the next one year.

Aster will issue shares to Quality Care's private equity shareholders in a deal that values Quality Care at an enterprise value of Rs 17,876 crore, which includes an equity value of Rs 16,983 crore.

Aster DM has assured investors that the merged entity will be earnings accretive which hinges on Quality Care turning profitable in the next one year.

Aster will issue shares to Quality Care's private equity shareholders in a deal that values Quality Care at an enterprise value of Rs 17,876 crore, which includes an equity value of Rs 16,983 crore.

The Story So Far

To put things in perspective, Quality Care in late FY24 acquired 78.25% in KIMS Healthcare Management Ltd. valued at around Rs 3,400 crore. It also acquired 60% stake around February 2024 in STS Holdings Ltd in February 2024, which operates in Bangladesh under the Evercare brand and is valued at around Rs 951 crore. Both the acquired entities had revenue of Rs 1101 crore and 700 crore respectively in FY24.

Quality Care consolidated revenues for FY24 stood at Rs 2,121 crore loss of Rs 176 crore with interest coverage ratio of 3.89 times, according to ratings agency Crisil. The financials does not incorporate the two new acquisitions which will be consolidated in FY25. The ratings agency expects consolidated revenue of Rs 3800 crore in the financial year 2025.

Aster DM is expected to post a revenue of Rs 340-350 crore on an annualised basis in FY25, with an Earning Per Share of Rs 6.8 per share. For the merged entity to maintain EPS at the same rate, the profit after tax for the merged entity will need to be at least Rs 592 crore in FY25. Which would mean that Quality Care hospitals need to turn profitable at the time of merger in FY25-FY26.

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The merger entity - Aster DM Quality Care, will have combined capacity of 10,150 beds and plans to increase additional bed capacity by around 3000 beds by FY27 and offering Cardiac and Oncology as one of the main specialities.

The merged entity will have a complete footprint in southern states with 30% of the operations in Kerala followed by Telangana at 22% and Bangladesh at 20%. The payor profile will also change as 60% payor will be in cash followed by 19% in Insurance and payment by government under various schemes increasing to 13%.

While the merged entity will be net debt free, the growth and profitability of the merged company will be key to Aster DM maintaining superior valuations to some of the regional peers.

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