Trusting the young blood, an important process

Like most companies within Peepul’s portfolio, Medall went through a “J-curve”—a growth spurt after one or two years of capital infusion. It was an experiment in Indian diagnostics—Reddy backed Raju Venkatraman, a friend and a successful entrepreneur who had built and sold two IT companies. In a highly fragmented market, there was scope for a large diagnostics company to consolidate, standardise and grow with franchisees. Medall began well—it acquired 24 companies in about nine years, becoming the fifth largest diagnostics company in India.

The first exit talks for Peepul began in 2015 when Bengaluru-headquartered Manipal Hospitals showed interest in buying Medall for an enterprise value of Rs 1,000 crore ($135 million). People close to the developments say the difference between Manipal’s offer and Peepul’s ask price was a whopping Rs 700 crore ($94.6 million). Unbridgeable; it was way beyond the Ebitda multiples of how companies are valued in the sector.

Then, between Dubai-based Abraaj Group and US’ Constellation Alpha Capital, with a smattering of other buyers in the middle, Medall’s reported valuation swung from Rs 1,600 crore to Rs 1,450 crore around 2018. Nothing worked out.

Today, Medall has serious cash flow issues. Multiple sources inside and outside the company say salaries are not being paid on time; several radiologists have left. Peepul’s investor director, Arjun Ananth,took over as the CEO from Venkatraman in November 2019. (Incidentally, he’s been the investor director in a few other troubled companies like food and beverage business Maiyas, Mahadevan’s Oriental, and Cura Healthcare.)

Insiders say profits at this diagnostics firm are shrinking rapidly—from Rs 95 crore ($12.8 million) in 2018 to less than Rs 40 crore ($5.4 million) today. The Ken couldn’t independently verify these figures because Medall hasn’t filed its financial results for the year ending March 2019. CEO Ananth did not respond to this and other questions sent via email on 9 March.

Having started with a 78% stake, Peepul bought back most of the remaining shares in 2018. So, Medall is virtually a Peepul-owned company now.

What happened at Medall is both sad and intriguing. Sad because the Indian industry desperately needed a success story of a private diagnostics company making it big. All large path labs in India went to the public market for funds. It’s intriguing because Medall squandered away its market leadership all too soon.

“Medall lost a lot of their partners, who left and cannibalised its market immediately after the cool-off period. How could Medall let it happen?” wonders a healthcare entrepreneur from Bengaluru. For instance, two founders who sold their diagnostics business to Medall started the same business, Prima Diagnostics and Celara Diagnostics, the latter in exactly the same location in Bengaluru. “Instead of solving for that, the investor is busy infighting. It’s crazy.”

Familiar stories

A senior Medall executive who spent many years at the company and left recently says he never understood why the deals never happened. “Deal after deal with strategic investors fizzled out. What did Sandeep Reddy want? In so many years the senior management at Medall never figured, or at least it wasn’t communicated to them, what the investor expected. If you don’t put it on the table, it’s a wild goose chase. Every due diligence takes a toll on the business for 3-4 months,” he says.

It was either a valuation issue or the buyer did not like what it saw. “If it’s the latter, then all the more reason the fund manager should call the management and tell them to clean up their act and set targets,” says the executive quoted above. “Sitting in an ivory tower and saying, ‘mine is always X-plus’ when we don’t know what is that X and what is X-plus.”

Multiple people involved in the chain of due diligences for Medall converge on three key issues:

Unrealistically high valuation

  • Public-private partnerships in a few southern states took a lot of management bandwidth, adding to cash flow woes; the promoter used up much more capital to arrive at pre-agreed milestones than initially agreed upon
  • Buyers did not appreciate the PPP model; they were also not impressed with more radiology and less traditional pathology services in the company

“Medall did add pathology tests later on, but perhaps it was too little too late,” says a healthcare professional from Delhi who has closely followed the company.