SHAREHOLDERS QUESTION FORTIS-MANIPAL DEAL
Valuation of hospital, diagnostics businesses unfavourable, say analysts
Ace investor Rakesh Jhunjhunwala and many minority investors are said to be questioning the Fortis Healthcare (FHL) deal with Manipal Hospitals, according to news reports. A private equity firm has also been reported to have raised its stake in FHL to attain extra voting rights and is said to be wooing some more minority investors, including hedge funds, to oppose the deal.
Which is not surprising. The disappointment of investors was evident from the announcement of the deal. FHL's share price saw a fall of about 13 per cent on March 28 after the announcement during the late evening a day earlier.
The concern of investors mainly centres on the deal’s valuation, which the Street believes is unfavourable for Fortis. Though the Street was anticipating the entry of new promoters (after the stake of existing ones fell to less than one per cent) and for this to act as a trigger for the stock price, the hospital business was also expected to fetch better valuation.
Under the deal, the entire hospital business of FHL is to be merged with Manipal and the merged entity listed on the exchanges. FHL shareholders get 10.83 shares in the merged entity for every 100 in FHL. However, the deal values Fortis’ hospital business at
~96-97 a share, and analysts say this is at a 22 per cent discount to the sector.
On the positive side, the deal would make the merged entity one of the largest hospital chains in the country, with a pan-India network.
It could also drive significant operational synergies over the longer term. However, the valuation seems dilutive for FHL shareholders, given their 33 per cent stake in the merged entity as compared to the 67 per cent operating profit contribution by FHL to the combined hospital business, say analysts at ICICI Securities.
Manipal would also be buying a 50.9 per cent stake in the diagnostic business, SRL (20 per cent from FHL and the rest from investors). The diagnostic business value is at a 26 per cent discount to the sector on a trailing basis, say analysts at Edelweiss, who fee the deal is tilted towards Manipal-TPG. They see low possibility of the deal going through.
The promoters of Manipal Hospitals and TPG (a 20.7 per cent stakeholder in the former) would infuse primary capital of ~39 billion for buying out Singapore-listed RHT Health Trust. Though this will improve the hospital business’ operating profit, analysts say FHL shareholders are at a disadvantage. There is limited clarity on the use of the ~17 billion generated from sale of the SRL stake and future sale of the RHT stake (FHL should ideally return the cash to shareholders), say analysts at Edelweiss.
More, the transaction will create a holding company for SRL, likely to attract a holding company discount.
With many such questions yet to be answered, experts are waiting and analysts are keeping their ratings under review. ICICI Securities says it is doing so because of limited clarity on financial data of the to-be-merged entity, strategy of the new management after completion of the transaction and uncertainty on timelines of deal closure, considering the requirement of various regulatory approvals, including shareholders’ nod. They don’t expect any major stock price movement until the deal gets consummated, expected by the March quarter of 2018-19. Based on the transaction, they have arrived for now at ~116 a share.