South Africa's Life Healthcare picks 26% in Max

Life Healthcare Group, the third-largest private hospitals group in South Africa, has snapped up a 26 per cent stake in New Delhi-based Max Healthcare Institute for around 850 million South African Rand (about Rs 516.5 crore), in what would be the largest foreign direct investment in the Indian healthcare sector.

A statement to shareholders on Tuesday said Life had entered into a non-binding agreement with the Indian healthcare chain— subject to a due diligence and the Reserve Bank approval in South Africa. The deal, to be settled in cash, is not entirely surprising since to Life had indicated earlier in its annual report that the company was positioning itself for international expansion, especially in fast-growing emerging markets.

South Africa has a sophisticated (and highly profitable) private hospitals sector. But the threat of government regulation in this viable market has seen a number of companies looking to diversify their operating bases by looking at offshore opportunities.

Life had earlier ventured into the UK market in 2004 in a joint venture arrangement. The company, however, pulled out of that country in 2008.

Life revisited its ‘international’ strategy last year when its MD Mike Fleming indicated that the company had formed a strategic partnership with the International Finance Corporation (IFC), a member of the World Bank Group, to encourage investment between emerging economies.

At that time he noted: “We intend to access markets where we have identified the scale and financial resources to drive demand for private hospital services and where we can leverage our skills.”

The Max Healthcare deal will see Life provide pro-rate guarantees for its proportionate share of the debts of the company (currently guaranteed by Max India). The Business Standard understands the debt is not material — at least not relative to Life’s strong balance sheet.

Life, which generates annual revenues in excess of $1 billion, is a strong cash generator, producing some 2.2 billion rand ($285 million) in the financial year to September 30, 2010.

While the Max deal is not likely to make a material impact on Life’s bottom line in the short term, market watchers reckon the investment underlines the commitment to secure business in fast-growing emerging economies.

The value of this deal represents around four per cent of Life’s more than 20 billion rand ($2.5 billion) market capitalisation on the Johannesburg Stock Exchange.

FOCUS ONLY ON MAX
The South African private hospitals group is open to other opportunities in the sprawling Indian healthcare market, but will probably focus exclusively on Max Healthcare for the next few years.

Life’s marketing executive Adam Pyle told this newspaper that the company had been investigating opportunities in India for a few years to secure foothold in emerging markets.

“India is a fast-growing market with increasing demand for private health care as well as strong growth in private heath insurance. But it’s fragmented and so offers us good growth opportunities.”

Pyle said Life was not brave enough to venture into India on its own. “We think Max Healthcare is the right partner for us. We like the company’s management, and the fact that the business offers an existing capacity of 1,000 beds as well as a greenfield opportunity through the building of new hospitals.”

Pyle said there were numerous synergies in the proposed deal that would yield efficiencies, including staffing, procurement and business processes.

Asked whether Life would be aggressively seeking other opportunities in India, Pyle said while Life could look at other deals there might be a preference to first bed down the arrangements with Max.

“We see the Max deal as an opportunity to understand the Indian market. For the next few years, we will be focussed on Max Healthcare.”