IHH-For­tis merger can still hap­pen

This is de­spite For­tis’ bind­ing agree­ment with Ma­ni­pal-TPG

The Star Malaysia - StarBiz - - Front Page - By DANIEL KHOO danielkhoo@thes­tar.com.my

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.

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