PublicInvest cautiously upbeat on IHH’s revised bid for Fortis

PETALING JAYA: Public Investment Bank Research (PublicInvest), which is cautiously optimistic on IHH Healthcare Bhd’s revised bid for India’s Fortis Healthcare, said while the deal is attractive, IHH may have to draw a line and walk away at some point if its terms are not met.

IHH’s latest proposal to outbid its suitors for India’s second-largest hospital chain includes 15 rupees a share increase from its earlier 160 rupees a share bid.

Total allocation for the bid is kept at 40 billion rupees (RM2.35 billion), with 6.5 billion rupees immediate equity infusion at 175 rupees per share, implying IHH taking up 6.7% stake, while demanding the right to appoint two directors on Fortis’ board.

The subsequent equity infusion of up to 33.5 billion rupees is non-binding and is subject to due diligence.

“We commend IHH’s price revision in its effort to remain competitive among the suitors, yet still standing firm at total value of 40 billion rupees at this point. Though acquiring Fortis is a very attractive prospect, we understand that at some point, IHH needs to draw the line and just walk away if terms are not met,” PublicInvest said.

While taking into account the “careful consideration” that IHH is putting into its offer, especially in terms of the major cash injection in the second part of the offer, PublicInvest noted a due diligence still needs to be done and IHH should be cautious of not falling into an unknown pit of debts.

“Overall, we are cautiously optimistic over the potential acquisition and look forward to more development within the next week,” it said.

The new offer price of 175 rupees per share would also mean that the stake IHH is eyeing will be around 30.6% which will be lower than the previously sought 32.5%, as the total allocation for the two-part equity infusion is capped at 40 billion rupees for now.

PublicInvest said assuming that 50% of the 40 billion rupees is funded with bank borrowings, the acquisition of Fortis will not be earnings accretive to IHH in the near term.

“Based on consensus’ forecast on Fortis’ profits, a 30.6% stake in Fortis will likely result in cost of borrowings diluting our FY19F earnings by c.10%. Nevertheless, we are positive over the long-term prospects, as we expect improved profitability of the hospitals, given IHH’s expertise and track record as a global healthcare player,” said the research house.

IHH’s offer is valid until May 15, and the board of Fortis will make a decision to evaluate the bids on May 10.

PublicInvest maintained a “neutral” call on the stock with an unchanged target price of RM5.79. IHH was unchanged yesterday at RM6 on volume of 2.8 million shares.