IHH in bat­tle for For­tis again

But con­cerns over In­dian hos­pi­tal op­er­a­tor’s legacy is­sues per­sist

The Star Malaysia - StarBiz - - Companies & Strategies - By DANIEL KHOO and GANESHWARAN KANA star­biz@thes­tar.com.my

THE bat­tle to ac­quire For­tis Health­care is heat­ing up and it will be closely watched by the mar­ket given that the win­ner of this bid will con­trol In­dia’s se­cond big­gest health­care provider.

Back home, if IHH Health­care Bhd’s (IHH) bid for the health­care provider is suc­cess­ful, it would see IHH even­tu­ally be the se­cond big­gest pri­vate health­care provider in In­dia af­ter Apollo Hos­pi­tals.

But the bat­tle will not be an easy one as IHH has to con­tend with the var­i­ous legacy is­sues that would en­tail with this po­ten­tial ac­qui­si­tion and also deal with po­ten­tial reg­u­la­tory hur­dles.

Other ob­servers say that the terms and cor­po­rate struc­ture that IHH will set­tle for in its bid for For­tis will be key as to how this bid even­tu­ally pans out.

Re­ports last week said that IHH is cur­rently the top bid­der, of­fer­ing as much as 160 In­dian ru­pees (RM9.51) per For­tis share.

An­other con­tender, TPG-backed Ma­ni­pal Health En­ter­prises Pvt, which wants For­tis’ hos­pi­tal op­er­a­tions to merge with its own busi­ness, re­cently upped its of­fer to 155 ru­pees (RM9.21) from 140 ru­pees (RM8.32) ear­lier.

Mean­while, the Mun­jal and Bur­man fam­i­lies, which col­lec­tively own a 3% stake in For­tis, has also joined the takeover bat­tle with an of­fer of 156 ru­pees (RM9.27) per For­tis share.

The in­tense com­pe­ti­tion for For­tis is ac­tu­ally un­der­stand­able, mainly due to the com­pany’s ex­pan­sive health­care de­liv­ery ser­vices in In­dia as well as other places such as Dubai, Mau­ri­tius and Sri Lanka.

An IHH spokesper­son de­clined to com­ment when con­tacted for this story and said that the com­pany will make the ap­pro­pri­ate an­nounce­ments should there be any ma­te­rial de­vel­op­ments.

Sources say that IHH is pre­pared to han­dle the legacy is­sues that come with the hold­ing com­pany and that an in­ter­est to ac­quire the com­pany has al­ready been there since last year.

“IHH did a due dili­gence on For­tis last year and what is hap­pen­ing now is a con­tin­u­a­tion of that. That process is a bi­lat­eral ne­go­ti­a­tions which did not pan through then.

“They did do due dili­gence last year and made to the two broth­ers – Malvin­der and Shivin­der Singh – a con­di­tional of­fer,” a source says.

“One of the con­di­tions was for the broth­ers to un­wind this struc­ture of the trust which is listed in Sin­ga­pore: RHT Health Trust that has all For­tis’ hos­pi­tals parked un­der it.

“The broth­ers could not pro­vide cer­tain as­sur­ances on the stake they could ef­fect in this trans­fer, so the deal fell through,” the source adds.

It is un­der­stood that IHH had wanted to en­sure that when and if it even­tu­ally is able to buy the stake in For­tis, it did not just want a large mi­nor­ity stake but a con­trol­ling stake and that could not be ful­filled due to the rea­sons stated above.

Things have changed how­ever, given that the broth­ers are now not a sub­stan­tial share­holder at For­tis any­more while the health­care as­sets (which in­cludes 16 clin­i­cal es­tab­lish­ments and two op­er­at­ing hos­pi­tals) which are parked un­der RHT are now en-route to be trans­ferred to its con­trol­ling share­holder For­tis.

The trans­fer would re­quire For­tis to pay 46.5 bil­lion ru­pees (RM2.76bil) for RHT’s en­tire port­fo­lio of hos­pi­tal as­sets and also re­quires the con­sent from RHT’s bond­hold­ers.

An an­nounce­ment to the Sin­ga­pore Stock Ex­change last week said that RHT was ask­ing bond­hold­ers for a six-month ex­ten­sion of the S$120mil of 4.5% coupon bonds that are due to ma­ture in July 2018.

To en­tice bond­hold­ers to say yes to the deal, the re­demp­tion amount by its new ma­tu­rity date of Jan 2019 would be in­creased slightly to 100.45 times the prin­ci­pal amount.

Mar­ket con­cerns

On one hand, For­tis looks at­trac­tive to its prospec­tive buy­ers due to its di­ver­si­fied pan-In­dia pres­ence.

Health­care op­er­a­tors in In­dia have al­ways pre­ferred ac­qui­si­tions in or­der to ex­pand, given the smoother process and reg­u­la­tions as com­pared to tak­ing on a green­field project.

Valu­a­tions-wise, the group’s 12-month trail­ing price-to-earn­ings ra­tio stands at 17 times, sig­nif­i­cantly lower than its other re­gional ri­vals – in­clud­ing Malaysia.

On the other hand, de­spite the strong in­ter­est in For­tis from the in­vest­ment com­mu­nity, the pri­vate hos­pi­tal chain op­er­a­tor has its fair share of prob­lems in­ter­nally.

Ob­servers have raised con­cerns on whether For­tis could be a worth­while in­vest­ment, con­sid­er­ing its fi­nan­cial and op­er­a­tional risks.

The group has been in the red for the past two quar­ters of fi­nan­cial year 2018 end­ing March 31 (FY18), amid its cor­po­rate gov­er­nance is­sues that have been re­lated to the Singh broth­ers.

For­tis reg­is­tered a net loss of 236.1 mil­lion ru­pees (RM14.03mil) in the se­cond quar­ter of FY18, mainly as a re­sult of a one-time charge due to the clo­sure of a hos­pi­tal.

Rev­enues re­mained flat at 11.97 bil­lion ru­pees (RM710mil).

In the sub­se­quent quar­ter, the com­pany re­ported a net loss of 191 mil­lion ru­pees (RM11.35mil) due to a one-off gain by an as­so­ciate com­pany in the year-ear­lier pe­riod. Its top line de­clined slightly by 1% to 11.21 bil­lion ru­pees (RM670mil) dur­ing the quar- ter.

Apart from its poor fi­nan­cials, For­tis’ stretched liq­uid­ity po­si­tion has led the group to de­lay in its debt ser­vic­ing.

As a re­sult, In­dia’s rat­ing agency ICRA has re­cently down­graded the credit rat­ings of For­tis and its sub­sidiaries, namely, Es­corts Heart In­sti­tute and Re­search Cen­tre, For­tis Hos­pi­tals and Hi­ranan­dani Health­care.

In a state­ment is­sued on April 10, ICRA said that the long term rat­ing of For­tis for the 2.5 bil­lion ru­pee (RM150mil) non-con­vert­ible deben­ture pro­gramme, 1.05-bil­lion ru­pee (RM62mil) fund-based lim­its and 1.95 bil­lion ru­pee (RM120mil) term loans have been re­vised to “C” from “BBB”.

Ac­cord­ing to ICRA, a C rat­ing in­di­cates a very high risk of de­fault re­gard­ing timely ser­vic­ing of fi­nan­cial obli­ga­tions, as com­pared to a moder­ate de­gree of safety for “BBB”.

The rat­ings agency points out that its down­grade de­ci­sion is due to For­tis’ de­lay in re­pay­ing a loan due on April 5, 2018

“The rat­ings con­tinue to be con­strained by con­cerns per­tain­ing to re­cov­er­abil­ity of the ad­vances ex­tended to re­lated par­ties, po­ten­tial im­pact of var­i­ous on­go­ing in­ves­ti­ga­tions lit­i­ga­tions, de­te­ri­o­ra­tion in op­er­a­tional per­for­mance and large pay­ments be­ing made to Reli­gare Health Trust (RHT),” states ICRA.

For­tis has been sub­ject to neg­a­tive press cov­er­age pre­vi­ously, pri­mar­ily af­ter the Malvin­der and Shivin­der Singh brotheru­pees were al­leged to have si­phoned 5 bil­lion ru­pees (RM297mil) cash out of the com­pany with­out board ap­proval.

The hos­pi­tal op­er­a­tor’s au­di­tor, Deloitte Hask­ins & Sells LLP, has ear­lier re­fused to sign off For­tis’ FY18 se­cond quar­ter re­sults un­til the money taken out by the Singh broth­ers is ac­counted for or re­turned.

This pre­vented For­tis from declar­ing its se­cond quar­ter earn­ings within the stip­u­lated 45-day pe­riod.

In an ear­lier Bloomberg re­port on Feb 10, mar­ket reg­u­la­tor Se­cu­ri­ties and Ex­change Board of In­dia has said that it was prob­ing the con­tro­versy sur­round­ing the group firms of For­tis.

Fol­low­ing the al­le­ga­tion and their other le­gal bat­tles, both of them re­signed from For­tis’ board in Feb 2018.

Their stake in For­tis has plunged to less than 1% from over 34% pre­vi­ously, given their in­abil­ity to re­deem shares pledged against loans.

Cur­rently, two fi­nan­cial in­sti­tu­tions, namely Yes Bank and Axis Bank, own 17% and 3% of For­tis shares, which were fore­closed from the brotheru­pees.

Mean­while, sources had said ear­lier that given that now the broth­ers own only a tiny piece of For­tis’ eq­uity that buyeru­pees feel like they can get the as­set for a bet­ter value by mak­ing an of­fer di­rect to the pub­lic share­hold­ers.

It is be­lieved that the ac­quirer would then fi­nally ne­go­ti­ate with Yes Bank for the block that they had fore­closed.

“For Yes Bank, hold­ing on to the 17% block can­not be a long-term strat­egy as be­ing a non-sub­sidiary since the cap­i­tal charge is puni­tive.

“Given this sce­nario, For­tis is clearly in need of a white knight,” the source says.

“Th­ese as­sets are rea­son­ably at­trac­tive, as long as IHH does not over­pay for the ac­qui­si­tion, it should be a good in­vest­ment,” the source adds.

And if this ac­qui­si­tion goes through, it would place IHH’s bed­count at 6,300 beds, ac­cord­ing to lat­est pub­licly avail­able in­for­ma­tion; and the Khaz­anah-backed IHH will be the se­cond big­gest pri­vate hos­pi­tal player in In­dia.

How­ever, can IHH be sure that it will be shielded from the prob­lems of For­tis Health­care caused by the pre­vi­ous share­hold­ers? A wrong call can be dis­as­trous for IHH.

Prized as­set: A For­tis hos­pi­tal in New Delhi. IHH is cur­rently the top bid­der for For­tis, of­fer­ing as much as 160 ru­pees (RM9.51) per For­tis share, ac­cord­ing to the lat­est news re­ports. — Reuters

Newspapers in English

Newspapers from Malaysia

© PressReader. All rights reserved.