Aster DM-Care merger: Key details and what it means for India's healthcare sector

While the potential strategic merger of Aster DM Healthcare and Care Hospitals is expected to create a substantial healthcare conglomerate enhancing the reach and capabilities of both organisations, analysts are anticipating it to be a significant development for the Indian healthcare sector.  

Deal Details

Sources familiar with the matter suggest that the merger will result in the formation of a new entity, likely to be named Aster DM Quality Care Pvt. Ltd. The merger will primarily involve a share swap, with an anticipated 50:50 ratio, indicating an equal exchange of shares between Aster DM Healthcare and Care Hospitals. This will be filed with the National Company Law Tribunal. The new entity will benefit from an extensive network of hospitals, clinics, and healthcare facilities, broadening its geographical footprint and expanding its service offerings.

Aster DM Healthcare, valued at approximately ₹19,068 crore ($2.27 billion), is expected to be valued at a premium due to its strong market position and growth prospects. Care Hospitals, valued at over ₹16,800 crore ($2 billion), will add further value to the merged entity. An open offer will likely follow the merger, in compliance with regulatory requirements. Azad Moopen of Aster DM Healthcare is expected to take on the role of executive chairman, with a joint management team overseeing the merged operations, said sources.

When asked about the development, a spokesperson of Aster DM Healthcare said, “We don’t wish to comment on market speculation." Meanwhile, analysts are upbeat about the financial benefits of the merger for both entities. “A potential merger between Aster DM Healthcare and Care Hospitals is expected to create value for shareholders of both entities. The combined entity would have a broad footprint and enhanced credibility, potentially becoming the third-largest hospital chain in India. We anticipate that the valuation multiple will expand post-merger to reflect the potential for higher earnings growth driven by synergies,” said Vishal Manchanda, Senior Vice President–Institutional Research at Systematix, a stock broking firm.

“The merger ratio will be crucial in determining the value accretion for Aster DM Healthcare shareholders. Care shareholders may benefit from improved liquidity and strategic exit opportunities in the medium to long term due to the advantages associated with the listing,” he said.

The deal is under regulatory review and will require approval from competition authorities. The final details of the merger, including the exact share swap ratio and other terms, are still being finalised. 

Challenges in the merger

As of now, Care Hospitals is primarily owned by Blackstone. The private equity firm acquired a majority stake in Care Hospitals from TPG Rise funds in a deal completed in May 2023. This acquisition marked a significant consolidation in the Indian healthcare sector. 

"The merger poses both opportunities and challenges. Integrating two large healthcare organisations with different cultures, systems, and processes will be complex. The new entity will have to manage the combined debt effectively, identify cost-saving opportunities through economies of scale, and retain key talent from both organisations. Public-Private Partnerships (PPPs) and other collaborations will continue to play a crucial role in the merged entity’s strategy," said a person aware of the matter.

The merger will allow the new entity to enhance its investment in infrastructure, technology, and talent, leading to improved patient care and outcomes. While the Moopen family is set to remain invested in the hospital business, the complexities of integrating multiple entities remain a challenge. Blackstone, which holds a 74% stake in Quality Care, and TPG, with a 26% stake, will be involved in the transaction. The merger discussions also include various routes, such as a potential 5% stake acquisition in each other’s entities, the person said.

The merger’s impact on the healthcare industry is expected to be substantial. The combined entity will likely challenge existing market leaders, intensifying competition in the sector. By sharing resources and best practices, the merger is expected to enhance patient care and improve outcomes. Additionally, the increased financial resources resulting from the merger will facilitate significant investments in new hospitals, medical equipment, and technology, further advancing the sector’s infrastructure.

“We have seen mergers and acquisitions in hospitals, branded generics, and diagnostics. All three segments are branded and have high gestation periods for organic expansion. We believe M&A in these spaces will continue, and the number of competitors will reduce over time,” said Aditya Khemka, Fund Manager at InCred Asset Management.

Performance of Aster DM Healthcare

Last fiscal year, Aster DM Healthcare strategically separated its Gulf Cooperation Council (GCC) business, unlocking significant value for its shareholders. The company announced a special dividend of ₹9,912 per share and retained ₹3,360 per share to support its expansion efforts in India.

Aster plans to enhance its Indian operations by adding approximately 1,700 beds, representing over a 30% increase, by the fiscal year 2027. A major focus will be on Kerala, where Aster operates with over 80% occupancy and achieves a margin of around 22%. The company is also working to regain government business in the Andhra Pradesh-Telangana cluster but short-term margin improvements are not expected, said a recent report from J M Financial. 

"The company faces challenges with Aster Labs, Aster Pharmacies, and its Operations and Maintenance (O&M) hospitals, which have pressured its margins. However, the introduction of small-scale O&M Asset Light hospitals aims to improve Return on Capital Employed (ROCE), although this initiative is still in the early stages. Additionally, the anticipated retirement of Dr. Azad Moopen in 3-5 years introduces uncertainty regarding the future governance of GCC operations," the J M Financial report said.

Despite these challenges, Aster’s stock price increased by approximately 23% over the past year, buoyed by a substantial ₹10,080 dividend, which yields 40%. The strong performance has led to a re-rating of its India business from 15 times to 20 times EV/EBITDA. 

The financial outlook for Aster's Indian operations remains positive, with projected revenue and EBITDA compound annual growth rates (CAGRs) of 16% and 21% respectively, over the fiscal years 2024 to 2027. However, concerns about margins, ROCE, and a net debt of ₹1,064 crore, which is 2.2 times EBITDA, persist. While margins have improved in the Maharashtra and Karnataka clusters, the Andhra Pradesh-Telangana region requires strategic focus to regain government business, the report said.

Aster Labs and Pharmacies are anticipated to break even by the late fiscal year 2024 and fiscal year 2026, respectively, with small-scale O&M hospitals approaching breakeven and showing promising growth projections, it added.

Although the outlook for Aster's Indian business remains positive, further improvements in margins, cash flows, and debt reduction are necessary for continued expansion, the report said. Consequently, J M Financial has downgraded Aster's rating to 'hold', valuing the company at 20 times June 2026 EV/EBITDA, with an additional ₹3,360 residual cash value, and a target price of ₹31,080.