IHH in battle for Fortis again
But concerns over Indian hospital operator’s legacy issues persist
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.
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