IHH wins race to acquire Fortis with Rs 40-bn bid, beats TPG-Manipal

Outbids TPG-Manipal combine, will invest Rs 40 bn at Rs 170 a share through preferential allotment

One of the largest healthcare group's in the world by market capitalisation, IHH Healthcare Berhad, has emerged as the winner in the race to acquire India's second-largest healthcare network Fortis Healthcare Ltd (FHL) by outbidding the other contender, the TPG-Manipal combine. IHH will invest Rs 40 billion at Rs 170 per share through a preferential allotment.

Both Fortis and Fortis Malar stocks responded positively to the news, going up by four per cent and eight per cent respectively during the day's trade. 

The Fortis board unanimously chose the IHH offer over TPG-Manipal's for the simplicity of the proposal, relative certainty as well as the price per share. "Both are reputed players in the healthcare sector and we would have been delighted to have either as partner," Fortis chairman, Ravi Rajagopal said. 

The four-month long bidding war for the cash-strapped Fortis Healthcare, which operates a network of 34 hospitals (capacity of 4,600 beds), had seen interest from both domestic and international suitors, including China's Fosun. IHH's offer is at 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 be issued 235.3 million new shares of FHL through a preferential allotment that would give a 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 post-issuance. This will take IHH's shareholding in the company up to as much as 57 per cent. It would also make a mandatory open offer for the Fortis Malar Hospitals' public shareholders. 

Fortis said that the proposal provides for refinance of debt to the extent of Rs 25 billion. Funds infused would be used towards completion of the acquisition of the assets of RHT (which owns some of Fortis hospitals assets) and also to buy out the stake of PE investors in SRL, as well as to address short-term liquidity needs. 

The transaction, which is subject to shareholder and CCI approval, is expected to be completed within 60-75 days.  IHH would now have a majority representation on the Fortis board. While no change is management structure is expected, IHH may review the talent bench and eventually supplement or augment the same.

Ranjan Pai, MD & CEO, Manipal Group wished IHH well and said that 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 Rs 88.8 billion, or 22.3 times FHL's FY18 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 Rs 58 per share. 

The valuation, however, has come down post the revelations on inter-corporate deposits (ICDs) and controversies surrounding the Fortis and SRL brands. The company had made a provision of Rs 5.8 billion in its fourth quarter results, the recoverability of which is doubtful. 

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

The shareholder vote is expected to come up over the next few weeks, but proxy advisory firms like inGovern felt 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's 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 that the funds would be used for RHT acquisition (earlier planned sometime around September end), offer exit to investors in SRL and to pare debt. 

Why IHH is keen on Fortis

IHH said that the the Indian healthcare market is expected to grow significantly and Fortis is one of the prominent players in tertiary and quaternary care. Fortis also has a strong pipeline for brownfield 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, managing director and chief executive officer of IHH said in the short term the group will 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 and 13,200 support staff who catered to 2.6 million patients in FY18. IHH currently, runs seven hospitals with 1,500 beds in south and west India. Its Indian business contributed Rs 12 billion in revenue which was around six per cent of the total in 2017.

Healthcare revenue in India is set to reach $275 billion over the next ten 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. About 1.54 million more doctors are required to meet the growing demand. 

Risks

The Fortis management said that 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 (Sebi and Serious Fraud Investigation Office) is unlikely to have any impact on the deal. Fortis CEO Bhavdeep Singh said that the ICDs have 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 loss-making, it may take a period of time for IHH to generate sufficient returns from its investment in Fortis and Malar to offset the costs of its investment. 
 

Deal in a nutshell 

• IHH to invest Rs 40 billion at Rs 170 per share for 31 per cent stake in Fortis
• Will invest additionally up to Rs 33 billion by way of an open offer. This could increase it's stake to 57 per cent
• Proposal for refinancing of Rs 25 billion debt. Fresh capital will be used for acquisition of hospital assets owned by RHT Trust, SRL's minority shareholders and short-term liquidity needs
• Deal will require shareholders and CCI approval and is expected to be completed in 60-75 days