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IHH buys Fortis: The road ahead

IHH buys Fortis: The road ahead

IHH buys Fortis: The road ahead
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By Ekta Batra  Jul 13, 2018 5:38:10 PM IST (Published)

The ‘Fortis’ brand is owned by a promoter company, for which Fortis pays a license fee of about Rs 3 crore per year.

The new Fortis board on July 13 said it accepted Malaysian hospital chain IHH’s offer to buy out the company.

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Ironically, IHH was the same company that was in a bidding war with Fortis for Singapore health services firm Parkway. Life has come a full circle for Fortis with this deal.
In July 2010, IHH’s owner Khazanah pipped Fortis to buy Parkway hospitals by offering 3.95 Singapore dollars for each share of Parkway compared to the Fortis’ offer of 3.8 Singapore dollars.
Eight years later IHH has done it again,  beating Manipal-TPG to buy Fortis.
It has been no less than rollercoaster ride for Fortis in 2018 as the company has been sold three times over the last four months.
On March 28, the Fortis board announced bringing Manipal-TPG on board. Investors, however, were unhappy with the deal which led to the company seeing unsolicited bids from Munjal-Burman, Radiant-KKR, Malaysia’s IHH and Chinese company Fosun.
The second round in May saw Munjal-Burman emerging as the winning bidder. This decision, however, was fraught with challenges as allegations of a ‘biased’ board surfaced.
The board of Fortis soon saw a rejig that led to the new members announcing fresh bidding process and a 10-day due diligence for all prospective bidders.
All four bidders conducted the due diligence but only Manipal-TPG and IHH submitted final bids. The board, a few days after releasing the company’s audited fourth quarter numbers, announced the final winner – IHH. Incidentally, IHH and Manipal-TPG were the initial two bidders in Fortis.
Deal Structure
IHH, according to analysts, offered a simple structure. The deal involves a fund infusion of Rs 4000 crore at Rs 170 per share.
This Rs 4000 crore will provide a solution for Fortis’s liquidity concerns, funding of the Singapore listed REIT – RHT and exit to private equity investors in SRL Diagnostics.
The accepted deal is likely to result in a 31% dilution. IHH is also going to make an open offer for an additional 26% stake.
The price per share for this open offer will not be less than Rs 170 with the total size up to Rs 3300 crore. Factoring in the open offer, IHH’s holding in Fortis can go up to 57%. The company has also announced debt funding of Rs 2500 crore.
Finally, the deal also includes an open offer for Fortis Malar, at Rs 58 per share. The deal is subject to shareholder and Competition Commission of India (CCI) approval and is expected to be completed in the next two months.
Effect On The Bottomline
Analysts are of the opinion that the IHH deal will help Fortis in addressing issues such as attrition and eventually boosting pure profits (EBITDA) back to a historical run-rate of Rs 750-800 crore.
IHH is the second largest healthcare services firm by market capitalisation with 10,000 beds across nine countries and calls India a home-market besides Malaysia, Singapore and Turkey.
The company has some experience of running a business in India through its stake in Apollo Hospitals which it exited a few years ago. It also has a joint venture hospital that it runs with Apollo in Kolkata, but its standalone experience is limited.
IHH currently has fewer than 10 medical facilities in India with nearly 1,600 beds. IHH, along with Fortis, will now have over 6,000 beds in India and 350 diagnostic centers.
The concerns surrounding the big picture and the granular still remain. On the industry front, risks include price controls on medical devices beyond stents and knee plants and handling sensitive cases of overcharging patients. On the other hand, it’s most important hospitals such as Fortis Escorts are located in the Delhi/ NCR region.
The Delhi government has released a draft paper outlining a thought of regulating private hospitals. It is looking at measures such as capping prices of medicines and consumables.
The Supreme Court on 9 July ruled that private hospitals in Delhi who are operating on subsidised government lands must provide free treatment to the poor. Analysts are concerned about the impact these measures could have on the company which has close to a six of its beds in this NCR region.
Core financials
IHH will also have its plate full with the financials of Fortis. The company’s consolidated sales in fourth quarter fell of 3 percent to Rs 1086 crore with hospital revenue falling 5 percent and occupancy reducing to 65 percent as against 70 percent a year before.
Consolidated margins in in the fourth quarter of last year fell to 1.2 percent with hospital margins at just 4.8 percent. The diagnostic business also faced pressure with revenue in fourth quarter up a mere 4.5 percent on a year-on-year basis and margins falling around 400 basis points to 15.6 percent.
Compare this to industry peers like Dr Lals who saw revenue grow 21 percent in fourth quarter with margins improving almost 200 basis points to 24 percent.
Apart from this, analysts are also expecting Fortis’ debt to reach nearly 2500 crore as against current levels of Rs 1000 crore of net debt as IHH completes the RHT and SRL transactions.
Branding Concerns Loom
A branding issue too continues to loom. The ‘Fortis’ brand is currently owned by a promoter company, for which Fortis pays a license fee of about Rs 3 crore per year. This is currently under litigation and it is likely that IHH could bring its own brand and renames the hospital chain.
IHH will also have to reconcile with the findings of the ongoing SEBI, SFIO probe, forensic audit and recovering the inter-corporate deposits of around Rs 450 crore allegedly siphoned by promoters.
So, while shareholder and CCI approval will be near-term hurdles, it seems that IHH will have a lot more to traverse with Fortis.
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