Sahrudaya Healthcare Pvt. Ltd.

• Group members:
1. Sankalp Mishra - BD22092
2. Subham Jyoti Mishra - BD22112
3. Nielakshi Saxena - BJ22135
4. Soham Roy - BJ22154

Summary of the case:

SHPL had started its operations in partnership with Sarvejana Healthcare Pvt. Ltd. on a 49:51
equity basis. The new venture turned out to be a highly profitable one and SHPL was able to
regain its 100% equity in the partnership a year into the business. The company continued to
enter into new ventures through partnerships. However, in 2015, SHPL and Sarvejana
Healthcare ended the partnership. SHPL continued the business with complete control and
ownership with the promoters and opened many hospitals in smaller cities of Hyderabad based
on a low capital expenditure model. The company diluted 28% of equity holding to gain capital
contribution from angel investors. However, even when the businesses were profitable, the
company faced cash flow problems due to delays in credit revenues from government agencies.
The interest payments were also becoming huge for the company. Thus, the company has been
in talks with private investors to raise capital in exchange for a part of the ownership of the
company.

Major issues in front of the company:

The PE investor, Samara Capital had now involved Medicover, a major multinational healthcare
and diagnostic service provider which was founded by one of their major limited partners. Post
the meeting, a proposal was made by Medicover for investment in SHPL and becoming a
strategic partner instead of Samara Capital.
The company has the following major questions that must be decided by the top management
before negotiating the deal:
1. How much equity and control was SHPL ready to give to Medicover?
2. What percentage of equity would Medicover seek for the investment they make?
3. What would be the terms and conditions of the deal between the two entities?
4. What would Medicover's valuation of SHPL be?
5. How much would Medicover be willing to invest and how much board control would it want?
6. Would Medicover pay in tranches or make one-time payment of the capital?

Alternatives available:
They can have better cash flow rights at the expense of control rights or better control rights at
the expense of cash flow rights. Dilution of equity has been long planned but the amount of
dilution is dependent on the valuation of the firm. The terms and conditions of the contract will
also be framed accordingly. They can either seek investment to the extent of easing off the
current debt liabilities and maintaining a health interest coverage ratio or seek higher investment
in anticipation of increasing capital expenditure and growth of the firm leading to better cash
flows in the future.
Conclusion:

• Valuation of SHPL:
Using FCFF method, the valuation of the firm comes out to be 13225 million at WACC of 781%
and perpetual growth rate of 2%.
With this, the intrinsic value per share is INR 663.49 given the number of shares as 19932384.
This shows that the firm is indeed undervalued and the investment decision of Medicover is
quite promising and rational.

• Investment & Equity dilution:

Pre-money valuation: INR 611.837 million
Investment: 257.8 million (based on the forecasted balance sheet showing the difference in
Equity capital)
Number of shares pre-investment: 19932384 shares
Avg price per share pre-investment: 30.7 rupees (Since last round of investment was 150.86
million for 4.9 million shares)
Number of shares to be issued: 8398584
Equity to be given: 30%

• Terms and conditions of the deal between the two entities:

SHPL can negotiate on the following terms and conditions:
Investment amount and stake: INR 257.8 million at a 30% stake
Dividend or distribution rights: SHPL can negotiate that the dividend will be non-cumulative
and will have a fixed rate of return.
Liquidation preferences: In the event of a liquidation, Medicover will receive their invested
capital back before other shareholders receive any proceeds. Should be negotiated at X amount
on the upside and X + unpaid dividend on the downside.
Voting rights and board representation: SHPL should negotiate for Medicover firm to have
limited voting rights on matters that significantly impact the business, such as mergers and
acquisitions. While Medicover will seek a board seat representation, SHPL should negotiate for
not giving a board seat
Redemption rights: SHPL should refrain from giving any redemption rights to Medicover. It is
an important right that affects the level of control of the firm.
Anti-dilution: Should negotiate for a weighted average rachet
Drag-along and tag-along rights: Medicover can negotiate for limited drag-along and tag-
along rights, meaning that they may only require a portion of the other shareholders to sell their
shares in certain circumstances.
Exit strategy and timeline: Should negotiate for a convertible preferred stock with a 5-year
investment horizon, after which Medicover can plan to exit their investment and in case of
liquidation of the firm, they can have higher preference over other shareholders.
Information rights and reporting obligations: SHPL should negotiate such that it will provide
Medicover with regular financial and operational reports, however, Medicover will not have the
authority to intervene in the daily operations of the business.