IHH-Fortis merger can still happen
This is despite Fortis’ binding agreement with Manipal-TPG
PETALING JAYA: There is a likelihood that IHH Healthcare Bhd’s proposed acquisition of Fortis Healthcare Ltd could still proceed if the former can persuade and convince the latter of a value-enhancing proposition, although it is off the table for now.
IHH, South-East Asia’s largest hospital operator, yesterday announced that the proposed acquisition of Fortis, India’s second-largest healthcare provider, was off for now because Fortis was unable to engage with it.
This is due to Fortis having entered into binding agreements with Manipal Health Enterprises Private Ltd, Manipal Global Health Services and TPG Asia – collectively known as Manipal-TPG.
IHH’s shares dropped two sen yesterday to RM6.10 on the news.
Fortis shares, meanwhile, fell about 2% after the announcement.
“At this juncture, IHH has not entered into any discussions, negotiations or transactions. IHH will make appropriate announcements to Bursa Malaysia in a timely manner should there be any further material development on this matter,” it said.
However, observers said there was still a chance for a deal if Fortis was not happy with the value-accretion from a potential merger with Manipal-TPG.
“After all, Fortis did not fully disclose the complete terms of the ‘ binding agreements’ and IHH is also offering a higher price for Fortis, compared to the Manipal-TPG guys. I don’t think the story conclusively ends here now. There could be
a chance that IHH could improve on its bid,” said an observer.
MIDF Research’s healthcare analyst said she did not fully discount the possibility of Fortis reconsidering the IHH offer in the near future.
“I think with this development, IHH can choose to pursue other deals in India. But I believe that IHH’s value proposition for Fortis is quite reasonable and this could resurface at a later time when the Fortis and Manipal-TPG’s binding period has lapsed,” she said.
After all, the letter of expression of interest sent by IHH to Fortis had also alluded to the protracted talks that have been happening between Fortis and Manipal-TPG.
“We note that the company has recently entered into an implementation agreement with Manipal-TPG for a transaction that involves various complex steps over a prolonged period,” IHH said in the letter dated April 11.
“We believe we can provide an alternative transaction construct, which in our view, would offer a better option to the company’s (Fortis) shareholders at an attractive valuation,” IHH added in the letter to Fortis.
In the letter, IHH had offered a price of up to 160 Indian rupees per Fortis share to its shareholders to acquire the whole company, subject to a satisfactory completion of a limited due diligence.
The IHH offer values Fortis at 82.99 billion rupees (RM4.93bil), compared with Fortis’ current market capitalisation of 77.539 billion rupees (RM4.61bil).
Manipal-TPG’s latest offer for Fortis was at 155 rupees per Fortis share, which values the company at 80.398 billion rupees (RM4.78bil).
In putting forth its offer for Fortis to consider, IHH said that it believes in the potential of the Indian healthcare story and is fiercely committed towards expanding its Indian footprint.
“Our partnership represents the best way to deliver maximum value to our respective shareholders, as well as creating a more efficient and competitive company that will leverage on IHH’s global private healthcare experience and leadership,” the company said.
To convince Fortis’ shareholders of the viability of its offer, IHH said that at this critical juncture, Fortis needed a visionary strategic partner with significant operational expertise and sufficient balance sheet strength to navigate troubled waters and steer Fortis in the right direction.
IHH noted that Fortis had several issues that needed to be swiftly addressed as it would pose significant challenges to it.
Among them are the ongoing investigations by regulatory authorities in India such as the Securities and Exchange Board of India, the Enforcement Directorate, the Serious Fraud Investigation Office and the Registrar of Companies with respect to multiple red flags raised by its auditors.
It also included tightened complex credit lines and a lack of liquidity that is causing various problems in Fortis’ day-to-day operations.
IHH also said the operational performance of Fortis has been tepid compared with its peers and it is unable to access funds in the equity capital markets.
The Khazanah Nasional Bhdbacked IHH highlighted that Fortis’ board has seen a high level of turnover, noting that the present reduced size of the board for a public-listed company of its scale and size had adversely impacted the decision-making process.
It said the litigation against the former promoters of Fortis and the lack of capital have created roadblocks for the consummation of strategic transactions such as the demerger of SRL Ltd and the acquisition of the assets of the Singaporelisted RHT Health Trust for nearly two years.
In light of these circumstances, IHH believes that it can play a complementary role to Fortis, should the latter consider its offer.
“IHH brings an impeccable reputation, high corporate governance standards, deep financial resources and strong operational expertise honed through successfully running hospitals globally, coupled with a proven track record in India and will be the best suited partner for Fortis to tide through the currenct crisis,” it said.
“As part of our proposal, IHH will work with the board and management of Fortis to identify optimal financing solutions to enable the company to fulfil its commitments during this challenging phase and stay afloat,” it added.
IHH said that due to the value represented by its proposal, it expects the Fortis board to engage in a full review of its proposal, bearing in mind also the board’s fiduciary duty to protect and maximise shareholder value.
IHH said it would give the board of Fortis until 5pm India Standard Time on April 18 to consider the offer.
Fortis said on Monday its board is expected to meet this week to look at all eligible options after the company received three bids from interested parties, reported Reuters.
Indian rival Manipal Health Enterprises had last month offered to buy its hospital business. Some of Fortis’ minority shareholders are dissatisfied with the Manipal offer, and it is unclear if the IHH price appeals to them.
A merger with a hospital chain such as Manipal might make more sense, said an analyst with a brokerage in Mumbai, adding that more details of the IHH offer were needed.
Two Indian investors – Sunil Munjal’s Hero Enterprise and the Burman Family Office – had offered last week to make an investment worth 12.5 billion rupees (US$191.5mil) in Fortis.