IHH Healthcare to make voluntary open offer to buy non-promotera shares of Fortis

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IHH Healthcare Bhd is expected to make an open offer to buy the non-promoter shares of Fortis Healthcare soon.

This follows the company’s decision towalk out of bilateral negotiations with promoters Malvinder and Shivinder Singh months earlier who were then in control.

The move will likely set the stage for a competition with a TPG-Manipal Hospitals combine as each side tries to acquire a minimum holding of 51%, going up to as much as 75% stake in the company.

Manipal is believed to be working with Kotak Mahindra. IHH, the world’s second largest healthcare group, has roped in investment bank Citi to advise on the process and is preparing a US$1 billion war chest to fund the share purchase, said multiple sources with knowledge of the matter. Talks are currently on with banks to tie up financing.

The promoters of Fortis currently hold less than 1% of the company — 0.77% to be precise. Yes Bank has emerged as the single largest shareholder with a 17.03% stake in India’s second-largest private hospital chain. The rest is widely held among public and other institutional shareholders.

IHH is unlikely to seek to acquire the promoters’ shares for now, sources said. The current market cap of Fortis is Rs 7,909.52 crore. It is not clear yet if IHH, which operates the Parkway Pantai chain of hospitals, will wait for law firm Luthra and Luthra to submit a report — due shortly — on the company’s treasury operations, inter-group and related-party transactions, allegations of the Singh brothers siphoning off money, and compliance with applicable laws and regulations. The law firm was brought in by the board-run company’s audit and riskmanagement committee. This followed the auditor Deloitte saying it was unable to comment or form an opinion on the company’s financial statements pending an investigation.

The IHH move to reengage with Fortis follows failed negotiations with Global Health, the parent of of Naresh Trehan-founded Medanta hospitals, for a potential deal valued at around Rs 5,800 crore, said sources tracking developments. Last June, IHH pulled out of exclusive negotiations on Fortis just days before signing on the dotted lines, worried about the legal implications of the legal battle between Daiichi Sankyo and the Singh brothers, unconvinced that it would gain undisputed ownership of the shares.

In February, following the Supreme Court lifting the bar on banks and financial institutions selling shares of Fortis pledged with them, most lenders such as Axis, ECL Finance, RBL and First Gulf Bank chose to cash out, leading to the promoter shareholding plummeting from 34% in the December quarter. Yes Bank kept the stock and is expected to play a decisive role in the open offers. Analysts said the entry of a strategic buyer will see a significant rerating of the Fortis stock, which has fallen 15% in the past 12 months.

“We have valued the hospital and diagnostic business based on 20x and 18x 1HFY20E EV/EBITDA, respectively. We cut EBITDA by 26%/9% for FY19/20E as we build in slower margin ramp-up,” MotilalOswal healthcare analysts Kumar Saurabh and Ankeet Pandya said in a note.

Fortis’ performance has been subdued of late. Revenue rose 1% in the nine months to December, impacted by lower occupancies across its network. The diagnostics business saw top line growth of 8% while the EBITDA margin narrowed 2.7%, primarily due to weak volume growth of 7%. IHH has been eyeing acquisitions in India as it seeks further expansion into emerging markets where a growing middle class is boosting demand for private hospitals. The group earns its highest per-capita revenues in Singapore, where inpatients bring in an average of US$6,400 per admission. It operates 50 hospitals in 10 countries, targeting higher-end private healthcare.

Asia’s largest hospital operator by market value, IHH swung to profit in the fourth quarter aided by strong growth in revenue from existing operations and new hospitals that opened last year. Net profit for the period ended December stood at $25.88 million while quarterly revenue grew 10%. Backed by Malaysian sovereign fund Khazanah Nasional, the company has also earmarked three billion ringgit for capital expenditure over the next three years to expand operations, IHH Healthcare chief executive Tan See Leng said last month.

Parkway Pantai has a strong presence in India, which it considers its fourth largest market after Malaysia, Singapore and Turkey. It entered the country in 2015 buying 51% in Hyderabad-based Continental Hospitals for Rs 300 crore and 74% in Global Hospitals, also based in Hyderabad, for Rs 1,280 crore. Last May, IHH ended its 12-year association with Apollo after netting Rs 1,900 crore from the investment. Interestingly, IHH and Fortis had competed aggressively when the Singh brothers unsuccessfully tried to acquire Parkway some years ago.


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