IHH outbids Manipal to win Fortis

IHH Healthcare Berhad, one of the largest health care groups in the world, won the race to acquire India's secondlargest health care network Fortis Healthcare Ltd (FHL), by outbidding the other contender, TPG-Manipal combine. IHH will invest ~40 billion, at the rate of ~170 per share, through a preferential allotment.

Both Fortis and Fortis Malar stocks responded positively to the news, going up by 4 per cent and 8 per cent, respectively, during Friday’s trade.

The Fortis board unanimously chose the IHH offer over TPG-Manipal for the purported simplicity of the proposal, relative certainty as well as the price per share. “Both are reputed players in the health care sector and that we would have been delighted to have either as partner,” Fortis Chairman Ravi Rajagopal said.

The four-month-long, high-profile bidding war for the cash-strapped Fortis Healthcare, which operates a network of 34 hospitals (with a capacity of 4,600 beds), had seen interests pouring in for domestic as well as international suitors, including China's Fosun International. IHH offered a 19.5 per cent premium to FHL's closing price on Thursday on the bourses. Northern TK Venture Pte Ltd, Singapore - a unit of IHH - will shortly be issued 235.3 million new shares of FHL through a preferential allotment, thereby giving roughly 31 per cent of the company's total voting equity share capital.

IHH will make a mandatory open offer to shareholders for 26 per cent of the outstanding shares after issuance. This will take IHH’s shareholding in the company to as much as 57 per cent. It will also float a mandatory open offer for the Fortis Malar Hospitals’ public shareholders.

Fortis said a proposal was made for the refinance of debt to the extent of ~25 billion. Funds infused would be used to complete the acquisition of the assets of RHT (that owns some of Fortis hospitals’ assets) and also to buy out the stake of PE investors in SRL Diagnostics. Besides, it will also address short-term liquidity needs.

The transaction is subject to approval from the shareholders and the Competition Commission of India. The process is expected to wrap up within 60-75 days. IHH would now have a majority representation on the Fortis board. While no change in the management structure is expected, IHH may review the talent bench, and eventually supplement or augment the same.

Ranjan Pai, MD and CEO of Manipal Group, expressed his best wishes to IHH, adding he respected the board's decision. "In our view, our own offer for Fortis reflected a comprehensive analysis of the risk and reward of the business."

Dip in Valuation

The offer values Fortis at ~88.8 billion -22.3 times FHL's 2017-18

Ebitda, and a 19.5 per cent and 15.3 per cent premium to the closing share price on July 12, 2018, and sixty-day volume weighted average price respectively. The Fortis Malar open offer is at ~58 per share.

The valuation, however, has come down after the revelations on inter-corporate deposits (ICDs), and controversies surrounding the Fortis and SRL brand. The company had provisioned for ~5.8 billion in its fourth quarter results, so, the chances of recovery is doubtful.

Rajagopal clearly stated that the board would have liked to see a better price, but the bidders had taken stock of the audited results and factored it into their calculations. TPG-Manipal had valued Fortis at ~180 per share in their previous bid, which they revised downward to ~160 per share. IHH, too, brought down its offer from ~175 per share earlier.

The shareholder vote is expected to come up over the next few weeks, but proxy advisory firms such as InGovern observed that the minority shareholders should be happy with the deal. Shriram Subramanian, founder and managing director of InGovern said, "Both parties want to quickly close the transaction. That is a plus. The company was losing ground, and has working capital issues. They now have a keen investor, and a strategic one, who understands the hospitals business."

The Fortis management said the funds would be used for RHT acquisition (earlier planned around September end), offer exit to investors in SRL and to pare debt.

Why IHH is keen on Fortis?

IHH said the the Indian healthcare market was expected to grow significantly and Fortis was one of the prominent players in tertiary and quaternary care. Fortis also has a strong pipeline for brown-field expansion on the back of existing land and infrastructure. “This can result in faster bed addition at a relatively lower- capital expenditure outlay per bed. IHH can catalyse the growth prospects for Fortis by leveraging its own strong execution track record, operational expertise, robust balance sheet strength, and strong corporate governance,” it said.

Tan See Leng, MD and CEO of IHH said in the short term, the group would look at improving margins of SRL Diagnostics by tying up with its global vendors for procurements and maintenance. “In terms of organisational drive, IHH plans outreach programmes, working with pathologists as well as the labs,” he said.

Fortis employs more than 2,600 doctors, 13,200 support staff, who catered to 2.6 million patients in 2017-18. IHH currently runs seven hospitals in south and west India, with 1,600 beds. Indian business contributed ~12 billion in revenue, which was around 6 per cent of total figure in 2017.

Health care revenue in India is set to reach $275 billion over the next 10 years. Rural India, which accounts for over 70 per cent of the population, is set to emerge as a potential demand source. Additional 1.8 million beds are needed for India to achieve the target of two beds per 1,000 people by 2025. Additional 1.54 million doctors are required to meet the growing demand.

Risks

Fortis management said there were no walk-away clauses, and were optimistic about the closure of the transaction. Disclosures have been made to the potential bidders and the upcoming investigation reports (by the Securities and Exchange Board of India and Serious Fraud Investigation Office) are unlikely to have any impact on the deal. Fortis CEO Bhavdeep Singh said the ICDs had been provisioned for and that there was no connection between the deal and the ICDs. IHH, on the other hand, felt that as Fortis is currently a loss-making entity, it may take a considerable period of time for IHH to generate sufficient returns from its investment in Fortis and Malar, to offset the costs of its investment.