This article first appeared in The Edge Malaysia Weekly on May 7, 2018 - May 13, 2018
NEWS reports out of India indicate that the bidding war for Fortis Healthcare Ltd has been narrowed down to two players, including Khazanah Nasional Bhd’s 40.61%-owned IHH Healthcare Bhd. The bids are expected to surpass INR185 per share from the present INR175 to INR176 per share offers.
The other bidder high on the shortlist is the consortium comprising Manipal Hospital Enterprises Pvt Ltd and TPG Capital.
Three others seen as less likely to succeed are Sunil Munjal of Hero Enterprise, which is making a joint bid with the Burman family of Dabur, China’s Fosun Health Holdings Ltd (an arm of Fosun International Ltd) and Mumbai’s Radiant Life Care Pvt Ltd, backed by buyout firm KKR.
But does Manipal-TPG have an ace up its sleeve in its “right to match” any competitive bid until May 6?
Reports out of India speculate that Manipal-TPG is likely to exercise this right and make a revised offer to take the lead. But The Economic Times of India quoted sources as saying that IHH may challenge the shortlisted bid and even launch a hostile takeover.
IHH — termed an “aggressive bidder” by the Indian media — had put in a last bid of INR175 or RM10.31 per share prior to the May 1 closing date. This was 9.3% more than its previous offer of INR160 or RM9.43 a share.
Of the other bids, Munjal-Dabur had offered INR167 (RM9.85) per share.
Radiant Life-KKR had made a revised offer that values Fortis at between INR170 (RM10) and INR175 (RM10.31) per share, depending on the valuation of Fortis’ unit SRL Diagnostics, which is to be demerged under the proposal.
China’s Fosun had offered US$350 million for a 25% stake in Fortis.
On the other hand, Manipal-TPG’s bid of INR63.22 billion (RM4.61 billion) includes a financial assistance of INR7.5 billion (RM547 million).
The binding offers will be evaluated by an expert advisory panel, and Fortis’ board is set to meet on May 10.
Reports also have it that shareholders controlling 15% equity interest in Fortis could block a potential sale to Manipal-TPG over bidding process concerns, which risks complicating the bidding process.
While most analysts seem neutral on IHH’s proposed acquisition, there are concerns.
In a May 2 report, JP Morgan indicated that IHH’s revised offer would result in the Malaysian healthcare group owning a 30.6% stake in Fortis, if the bid is successful. Thus, it would trigger a general offer, with the total enterprise value acquisition cost amounting to US$2.4 billion (RM9.45 billion) for a 100% stake.
JP Morgan says Fortis would help to strengthen IHH’s presence in India, where it has owned the network of Global and Continental hospitals since 2015. With Fortis in its stable, there would be a case for hospital margin expansion to drive growth (given good but underperforming assets), it adds.
“[In the] near term, however, uncertainty remains over the ongoing investigation of Fortis’ financials,” says JP Morgan.
The investigations referred to centre around former controlling shareholders, brothers Malvinder and Shivinder Singh, who owned more than 34% of Fortis as at the end of last year but have seen their stake shrink to less than 1% as they were unable to redeem pledged shares.
The brothers have a chequered track record, and are alleged to have siphoned off US$300 million from financial services firm Religare Enterprises, and US$78 million from Fortis.
Similarly, Macquarie Research, in a report at the end of last month, observes that “Fortis is far from a ‘clean’ acquisition, with ongoing investigations by various regulators relating to advances given to the group’s previous controlling shareholders of circa INR500 crore (about RM290 million) without board approval. Moreover, there are debt rating downgrades owing to its stretched liquidity position (as at end-2017, gross debt stood at RM1 billion versus cash of RM260 million), and volatile earnings track record.
“Further, such a sprawling acquisition comes with significant execution risk and extended gestation timelines — we note that even for the six Indian hospitals acquired by IHH in 2015, we have yet to see a sustained recovery in Ebitda (earnings before interest, taxes, depreciation and amortisation) three years on.”
In 2015, IHH acquired a 51% stake in the 750-bed super speciality hospital Continental Hospitals for RM166.73 million, as well as a 73.4% stake in Ravindranath GE Medical Associates Pvt Ltd, which runs Global Hospitals, for RM819 million.
All in, IHH has more than 10,000 beds in 50 hospitals across 10 countries, including Malaysia, Singapore, Turkey, India and China. As for Fortis, it manages about 30 hospitals in India.
Nevertheless, both Macquarie and JP Morgan are “neutral” on IHH, with Macquarie’s target price for the stock being RM6 while JP Morgan’s is RM6.30.
At its close last Friday, IHH was trading at RM6.01.
PublicInvest Research, which is also “neutral” on IHH, says assuming 50% of IHH’s acquisition of Fortis is funded via bank borrowings, the acquisition will not be earnings accretive in the near term.
“Based on consensus forecast on Fortis’ profits, a 30.6% stake in Fortis will likely result in cost of borrowings diluting our FY2019F earnings by circa 10%. Nevertheless, we are positive over the long-term prospects as we expect improved profitability of the hospitals, given IHH’s expertise and track record as a global healthcare player,” says PublicInvest, which has a 12-month target price of RM5.79 for IHH.
While most analysts are “neutral” on IHH, Kenanga Investment Bank Bhd has an “underperform” call and questions the proposed Fortis acquisition in a recent report. “Based on INR175 per share, the valuations are lofty at 76 times PER (price-earnings ratio) at FY2019E consensus net profit of RM70.5 million.
“Regional hospital providers are trading at an average of 35 to 38 times PER. The acquisition is expected to raise IHH’s net gearing from 3.3% to 14% as at Dec 31, 2017 … The proposed acquisition of Fortis is expected to be earnings dilutive in the short to medium term but should gradually be earnings accretive once operations ramp up.”
So, while IHH appears to be one of the front runners for Fortis, a successful acquisition is likely to be preceded by problems.
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