IHH's valuation tops the other two offers that Fortis got from Manipal-TPG consortium and a joint bid from Munjal (Hero) and the Burmans (Dabur).
A very good evening and a very warm welcome to Moneycontrol. My name is Rakesh and this is the story of the day. What we talked about? The Fortis-Manipal deal. Well, to put it simply, it's not been fun here at Fortis Healthcare.
The groups promoters Malvinder and Shivinder Singh were taken to court by Daiichi Sankyo for what the company called potential fraudulent transactions. Then came news that the Singh brothers siphoned off about 500 crore rupees from Fortis Healthcare. Fortis Healthcare’s financials show losses of 33.9 crores 73.5 crores and 74.7 crores in financial years 15, 16 and 17 respectively.The question on everyone's mind in the wake of these reported losses was where did the 500 crore rupees come from? Fortis’s response has been that the 473 crore loan made to entities controlled by the brothers was adequately secured and indeed was already being repayed.
The Singh brothers’ stake was subsequently reduced to less than 1% and they resigned from Fortis Healthcare board earlier this year. Then came news that Manipal hospitals in partnership with American investment from TPG Capital was looking at acquiring Fortis in the largest MNA deal in history of India's Healthcare industry.
The Economic Times reported that if merged, the combined entities market value is estimated two and a half two three billion dollars compared to Apollo Hospitals’ 2.55 billion dollars. Apollo operates approximately 10000 beds across 70 hospitals and Fortis and Manipal combined, would equal or just bout beat that number. Fortis is already India's second largest Private hospital Chain by market value. It should be noted here that India’s Healthcare industry is projected to grow at a compounded annual rate of 13% reaching nearly 6.9 lakh crore Rupees by 2020. Improving health care affordability, changing disease patterns, greater health awareness and rising insurance coverage are the drivers of this growth. India has 1.3 million hospital beds translating into 9 beds per 10000 people, which is well below the World Health Organisation standards.
The Manipal Fortis deal, estimated to be around 15000 crore rupees, met with some resistance from Fortis shareholders. Fortis management, took pains to underline that the deal would make sure the new entity would have little to do with the Singh brothers who are the focus of multiple probes by the serious Fraud Investigation Office that is SFIO and the Securities And Exchange Board of India, that is SEBI. They may even cease to be promoters of the company according to company officials. “We appreciate the strong brand that the Singh brothers have built, but Fortis needs to go its own way. The new step we take for Fortis would be a step without the promoters.” said the CEO of Fortis Healthcare.
Fortis’s deal with Manipal went something like this. Manipal Hospitals Enterprises Private Limited, promoted by Ranjan Pai of the Manipal group and PE Firm, TPG Capital Asia would infuse 3900 crore rupees of fresh capital into the venture. The board of Fortis Healthcare approved sale of its 20% stake in a sister concern SRL Diagnostics, to Manipal. The resultant entity Manipal Hospitals, will be a publicly traded company listed on both the National Stock Exchange and the Bombay Stock Exchange. FHL will be an investment holding company with 36.6% stake in SRL Limited. Ranjan Pai would become the largest investor in the group with the share of 37.9% while TPG would hold 20%.
But this deal Run into some rough weather. Some shareholders of Fortis Healthcare opposed the sale of Fortis to Manipal health Enterprises and TPG capital. The investors, led by India-focused Hedge Fund East Bridge capital, reportedly approached other Fortis shareholders including hedge fund Elliott Management Corp and a mutual fund with a large shareholding, to have the deal struck down. Billionaire Rakesh Jhunjhunwala, an investor in Fortis Healthcare also questioned the deal as per the Economic Times. This affected Fortis’ stocks is well, which slid whopping 13% in a single day on the 28th of March after the deal was announced late on the 27th of March.
Investors expressed deep reservations about valuation which they viewed as unfavourable. FHL share holders would receive 10.83 shares in the merged entity for every 100 shares held in FHL. Another road block was SRL Limited. Manipal hospitals would be buying a 50.9% stake in SRL Diagnostics, 20% from FHL and the rest from investors. SRL’s value was pegged at 26% discount to the Sector on a trailing spaces according to analysts at Edelweiss who said the deal is tilted towards Manipal TPG. They perceived a low possibility of the deal going through. Manipal NTPG responded with a revised offer. Fortis shareholders would receive more for the hospital business and they continue to remain invested in SRL Diagnostics via Fortis.
The revised offer would give 13 shares of Manipal health for every 100 shares of Fortis Healthcare instead of the earlier 10.83. This revised share swap ratio valued Fortis at 6061 crore rupees, 21% higher than earlier. Manipal health itself gets a valuation of 6070 crore rupees.
In the offer, Manipal would have bought 20% in SRL from Fortis for a sum of 720 crore rupees then buy a 30. 9% stake from other investors for rupees 1113 crores. Ranjan Pai and TPG Capital where to invest 3900 crore rupees through a preferential equity allotment into Manipal health. These were nowhere in the new offer.
The new deal would give Ranjan Pai and entities under his control a 30.9% stake in SRL for 1113 crore rupees with Fortis Healthcare owning a 56.6% stake in SRL and a minority owning the rest. The new offer values Fortis at 155 rupees a share up from the initial 140 rupees Ranjan Pai said in an interview, adding that Manipal has put its best foot forward. “I hope it's a binding bid. Good luck to them.” he went on to say.
All things considered with the revised offer from Manipal and TPG Fortis’ share holders seemed like that would be better off than earlier. Fortis’ stock price recovered moving up 0.7% to 147.65 rupees. As this back and forth continued, news emerged that Malaysian group ISS Healthcare BHD is interested in acquiring Fortis. Media reports indicated that the Kuala Lumpur based IHH is contemplating a cash offer for Fortis at a market value of round 1.2 billion dollars.
This saga took another interesting turn a couple of days ago with two of Fortis’ investors offering to infuse 1250 crore rupees into the company. Sunil Munjal, Anand Burman and Mohit Burman jointly proposed and investment of 1250 crores in two tranches of 500 Crore upfront and 750 over period of time, to help with immediate cash requirements that Fortis incurs in order to stabilize operations. Sunil Munjal is Chairman of Hero Enterprise Anand Burman is Chairman of Dabur group and Mohit Burman is MD of Elephant Capital and serves as a Director on Dabur’s board. Munjal and the Burmans own approximately 3% in Fortis. If their offer is accepted by the board, their combine shareholding is likely to increase to 10% according to Munjal.
In summary, even as Fortis is grapples with legal hurdles and debt woes, bidders are lining up. While the IHH group of Malaysia has offered a slight premium over Manipal’s offer, the bid submitted is non binding. This is likely to give an upper hand to the Manipal TPG combine. This is of course an evolving new story and we’ll bring you the latest as and when. Until the next time I see you, this is me Rakesh saying ‘thank you for joining us’, on Moneycontrol.