IHH out­bids Ma­ni­pal to win For­tis

Business Standard - - FRONT PAGE - SOHINI DAS & ANEESH PHADNIS

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.

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