The Hindu Business Line : Devaki Hospitals

We believe that the 15 per cent premium of the offer price vis-à-vis the prevailing market price is not attractive enough for shareholders to tender their holdings (it may be noted that the entire differential will not accrue to shareholders, as gains through such off-market transactions would come under the ambit of capital gains tax).

Also, given the background of the acquirers and their interest in the construction business, the possibility of Devaki morphing into a realty play at a later date cannot be ruled out.

Genesis of the offer

The current promoter of Devaki, Madras Medical Care and Health Centre, has entered into a share purchase agreement with the acquirer to transfer its shareholding of 24.33 per cent to the latter at Rs 18 per share.

This has, in turn, triggered an open offer for an additional 20 per cent to be acquired from the market. The current management is composed of a panel of eminent doctors, who will step down after the open offer formalities are completed.

Background of the acquirer

Mr A. N. Radhakrishnan, the Chennai-based acquirer, is the co-founder of a charitable trust that runs a host of educational institutions (in disciplines such as engineering, medicine, arts and science and hotel management) both in Chennai and Kancheepuram. The acquirer's interest in the construction business is through a proprietary outfit, Arvind Builders. Before Prior to entering into the agreement with the existing management, the acquirer, along with persons acting in concert, cornered 14.95 per cent of Devaki's equity through open market purchases.

Recommendation rationale

According to the offer document, the acquirer intends to improve the functioning of the hospital, apart from making available the facilities to students of medical institutions it manages. Though Devaki may not have the scale of some of the other hospital chains, it has strengths in the nephrology arena, and steps taken to better facilities would benefit shareholders directly. In the past Devaki has been entangled in legal issues, which involved the original promoters — the Eskeycee Medical Foundation. A resolution of these issues by the new management would be an added positive.

Alternatively, it could also be argued that given the significantly large area the hospital occupies in the heart of Chennai city, the acquirer may want to exploit booming opportunities in the real-estate space, given the overlap of business interests. Should such a move materialise, it could lend confidence to the stock; many an outfit has seen its stock undergo a significant re-rating on the back of a real-estate buzz.

Offer details

Through the open offer, the acquirer intends to mop up close to 15-lakh shares from the market at Rs 19 per share. The offer, which opened on November 3, closes on November 22. The manager to the offer is Indbank Merchant Banking Services.