Long but fruitful journey in IHH’s Fortis acquisition
Fortis set to bump up IHH revenue by some 20%
AFTER a long courting process between IHH Healthcare Bhd and India’s Fortis Healthcare, the latter has finally decided to accept IHH’s investment proposal to acquire a controlling stake in the company.
Despite being in a cash-strapped position financially, Fortis had seen many keen suitors along the way and IHH had, in turn, felt strong competition for the highly prized Fortis asset.
“There has been many ups and downs in this journey, if you recall that we were actually not selected before.
“It was a long journey indeed for us to acquire Fortis. This has been a long drawn 16-month journey, obviously my fellow colleagues who have been working very hard on this,” IHH group chief executive officer Dr Tan See Leng said at a press conference call yesterday.
It might have seemed as though Fortis was playing the hard-to-get game as IHH had to go through many hurdles to secure it.
At one point in May, IHH had thought it had actually failed after the Fortis board passed over and accepted the Hero-Burman Group’s offer instead.
But it was discovered then that the offer was lower than the bids from the other suitors: IHH and Manipal Hospitals Enterprises and thus the initial bid did not get the final okay from Fortis shareholders.
The bidding process then had to be restarted and IHH has now finally got what it has wanted all along.
Tan says that IHH feels very honoured and privileged to be the final victor as Fortis’ acquirer but also notes that work has just begun.
“Now that it is finally over, or I must say I do hope that it is over: we hope that the other shareholders will support this because this would still have to go through the other shareholders so we are not resting on our laurels and there is still a lot more work to do,” he says.
In the latest deal, IHH will acquire a 31.1% stake in Fortis through a subscription to a preferential allotment of Fortis shares at a price of 170 Indian rupees (RM10.04) per share.
IHH says in its presentation pack that it has to pay anywhere from 40 billion rupees (RM2.35bil) to 73.5billion rupees (RM4.3bil) for the preferential allotment, depending on the acceptance levels for the Fortis open offer.
This is because with the preferential allotment of 31.1% equity, IHH will then be the largest shareholder in Fortis.
As such, a mandatory cash open offer to the public shareholders for 26% of Fortis’ shares will be triggered, also at a price of INR 170 (RM10.04) a piece.
Subsequently, this will also trigger a mandatory tender offer to acquire 26% equity interest in Fortis Healthcare’s listed subsidiary, Fortis Malar Hospital Ltd (Fortis Malar), under the applicable provisions of Indian takeover code.
Fortis Malar’s principal business is to establish hospitals and clinics, and to operate such hospitals and clinics to provide comprehensive healthcare for the society in the various branches of medicine, as well as provide facilities for post graduate medical education or medical research.
Funds for the transaction will be sourced from IHH’s existing cash reserves and debt facilities, Tan says.
“We intend to keep the both Fortis and Fortis Malar listed post the completion of this exercise. The acquisition price of 170 rupees per Fortis share was arrived at after our due diligence,” Tan says.
“Post acquisition, we expect IHH’s revenue to increase more than 20% or about 23.7% to almost RM14bil per year. The number of hospitals we have will also significantly increase from 49 today to 83 and our exposure to India by revenue will also jump from 6% to 24%,” Tan says.
The acquisition is expected to be completed in the fourth quarter of 2018, subject to the timely approval by India’s regulators.
Commenting on the offer price, Tan says he does not believe IHH had overpaid for the Fortis asset, noting that the acquisition would also give it a controlling stake which naturally comes with controlling premiums.
“The trading price is about 140 rupees - 142 rupees and our current offer price is a 19.5% or 20% premium to it. For a controlling premium to take control and drive the company forward, I do not think that it is a very high premium to pay. It is generally accepted out there that for a party to take control of an asset that they would need to pay some form of a controlling premium,” he says.
The offer price represents a 22.3 times multiple of Fortis Healthcare’s earnings before interest, taxes, depreciation and amortisation for the last twelve months ended March 31, 2018.
Resuming operations
The Malar open offer is at 58 rupees per share, which represents an implied equity valuation for 100% of Fortis Malar of 1,092 million rupees (RM64mil).
Meanwhile, Tan says that the injection of funds with the acquisition would immediately help Fortis resume its normal business operations once again.
“The 40 billion rupees would provide the much needed cash that is necessary to ensure the return to normalcy of its day-today operations. It allows us time to identify and evaluate the related party transactions and of course to provide the funding needs that is required to take RHT private,” he says.
“Also given the fact that we have a superior credit profile and global banking relationships in IHH, we believe we can optimise the debt funding costs and realign the credit lines for Fortis. We are well positioned to do all these,” he adds.
He also notes that Fortis is in desperate need to cover overheads like rental costs, payments of wages and bonuses including its vendors.
“These needs to be quickly resolved so that the business operations can move back up to a normal state. But we continue to believe in this asset and we continue to persuade some of them to work with us: that there is a light at the end of the tunnel,” he says.
IHH also notes that Fortis has already provided for the provisions for the earlier investigations and this had already been certified by its auditors. “This is something that we take comfort in. “We are fairly confident that they have gone through a thorough process in that regard,” he adds.
CIMB Research, in an analyst report yesterday, estimated that the total 57.1% acquisition of Fortis could lead to about 8% increase in earnings before interest, tax, depreciation and amortisation (Ebitda), but a 15% decrease in net earnings for financial year 2019.
“This is assuming that the stake acquisition is completed by end-2018 and the new management’s ability to halve quarter three FY18 losses, with other forecasts unchanged.
“We forecast IHH’s net gearing to rise from the current 2.8% to about 22% by year-end,” says CIMB Research, which is maintaining its “add” rating and sum-of-parts-based target price of RM6.86.
However, based on annualised 2019 Bloomberg consensus estimates of RM355mil Ebitda and RM105mil net profit for Fortis respectively, there would be a 12% higher FY19 Ebitda and 6% higher FY19 net profit for IHH.