Fortis-RHT deal: Early for investors to rejoice

Analysts look at delay in proposed diagnostic demerger move

Fortis Healthcare’s proposal to buy all the assets of its Singapore-listed RHT Health Trust (RHT) for an enterprise value of Rs 4,650 crore, including a debt of Rs 1,152 crore, was taken well by the Street. Fortis share price gained over 11 per cent in Wednesday’s trade before closing at Rs 140.45, a rise of 7.7 per cent. While the restructuring move is aimed at enhancing shareholder value, it may be a bit early to celebrate.

Currently, Fortis has an indirect interest of 29.76 per cent in RHT. The proposed buyout and restructuring will bring the entire Indian assets under one umbrella. Fortis will be acquiring all of RHT’s Indian subsidiaries, a 49 per cent interest in Fortis Hospotel Ltd, and the entire asset portfolio of RHT, which includes clinics and hospitals (like Escorts Heart) in India.

The consolidation will not only be earnings accretive, but will reduce holding company discounts too, say experts. Fortis Hospitals, at a standalone level (hospital business), has seen pressure on profitability, and it is the subsidiaries that have been pulling up the consolidated performance. SRL and SRL Diagnostics have been major drivers of profit in FY17, and Fortis Hospotel Limited (Fortis’ 51 per cent subsidiary) has also contributed well to profit growth.

Fortis, in a statement, said the deal would add Rs 270 crore to its Ebitda (annualised net service fees based on June quarter figures it paid to RHT), besides interest savings of Rs 75 crore due to the acquisition of 49 per cent in Fortis Hospotel. These should be more than sufficient to service funds raised for the acquisition. Given RHT’s market capitalisation of $533.2 million (Rs 3,500 crore) as on  November 11, the transaction value also looks fair.

Analysts say the deal is positive, but its completion holds key. Fortis and RHT have entered into an exclusivity period of 60 days. Analysts say that while statutory approvals will be important, clarity on source of funding, among others, is crucial as the same is key for the deal’s completion and to determine benefits for Fortis shareholders.

The scepticism also stems from the fact that the earlier proposed demerger of Fortis’ diagnostics business is still pending due to court’s intervention. The demerger was looked as a key trigger for unlocking value for Fortis’ shareholders and had driven the stock to highs of Rs 230.90 in May 2017. But continued delays and negative news flow around group companies, even as they are separate entities, have impacted sentiment.

Fortis was also to declare its September quarter (Q2) performance, which remains delayed and Street will be eyeing for further cues. The company’s fundamental prospects remain decent as indicated by 

analyst expectations.