Apollo Pharmacy demerger: More than what meets the eye

In demerging its pharmacy business, Apollo Hospitals is splitting the ownership multiple ways. As baffling as it is, the endgame is not very hard to guess. It’s also one that could benefit one shareholding group more than the others

India’s largest hospital chain, Apollo Hospitals, is demerging its pharmacy business. But it’s a deal that makes it look more like a parking exercise than a clean demerger

By adding more layers to ownership, in an already complex corporate structure, the group will perhaps hurt the pharmacy vision and minority shareholders

Because if the buyback, as stated by AHEL, happens, the front-end pharmacy will not have much to show for

The group might end up combining the back-end distribution and the front-end retail. And there’ll be one shareholding group left on the sideline

Corporate structures are often a giveaway. Of strategy, culture, growth, and increasingly, of intent. Last week, shareholders of Apollo Hospitals Enterprise Limited (AHEL), India’s largest hospital chain, approved a major corporate restructuring. AHEL will de-merge its pharmacy business, Apollo Pharmacy Limited (APL), a country-wide chain of 3,428 pharmacies, effective April 2020. Antitrust regulator Competition Commission of India already gave the go-ahead for the move in September this year.

The demerger will see three financial investors—Enam Securities, Hemendra Kothari and Jhelum Investments—put Rs 527.8 crore ($74.6 million) on the table for 74.5% of Apollo Pharmacy. The remaining 25.5% stays with the parent, AHEL.

The kicker, or the footnote going by the lack of public attention, in the deal is that “the back-end business related to the standalone pharmacies which represent 85% of the business economics will continue to be held by AHEL”.

The question to ask then, is whether it really is a demerger. Or is it a parking exercise? A warehousing deal where the equity is given out, but the economic value is retained? Understandably, many in the healthcare industry are confused. AHEL acknowledged a set of questions from The Ken on 24 October but did not respond.

“If you are not confused, you are not paying attention,” author Tom Peters said in his best seller Thriving on Chaos. The management guru’s book may be dated, but his wisecrack isn’t.

Apollo Group’s peers and competitors are paying attention. The largest pharmacy chain in the country is being demerged from the largest hospital chain—a business that contributed Rs 3,886 crore ($549.5 million), or 39% of the consolidated revenue of AHEL in the year ending March 2019.

The restructuring is a masterstroke that will unlock value for the hospital group that has debt piling up. In the last three or four years, AHEL aggressively expanded with new hospitals that took longer to break even, resulting in over Rs 3,200 crore ($452 million) of debt at the beginning of this year. Promoter shares pledged to unreasonable levels of 78% will now be brought down to 20%, thanks to money from the demerger and divestment of the insurance business that is used to reduce credit crunch.

As of March, the company’s debt exceeded its net worth. Not surprisingly, last month, the promoters divested 3.6% holding in the hospital to bring down debt and associated pledges, reducing their total shareholding to 30.8%.

The current share price of AHEL doesn’t reflect the value of the pharmacy chain which is a high ROE (return on equity) business with higher multiples in valuation

A hedge fund manager

AHEL is a complex mesh of 37 subsidiaries and associate companies.

AUTHOR

Seema Singh

Seema has over two decades of experience in journalism. Before starting The Ken, Seema wrote “Myth Breaker: Kiran Mazumdar-Shaw and the Story of Indian Biotech”, published by HarperCollins in May 2016. Prior to that, she was a senior editor and bureau chief for Bangalore with Forbes India, and before that she wrote for Mint. Seema has written for numerous international publications like IEEE-Spectrum, New Scientist, Cell and Newsweek. Seema is a Knight Science Journalism Fellow from the Massachusetts Institute of Technology and a MacArthur Foundation Research Grantee.

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