Fortis shareholders disappointed by valuation, analysts see value accretion in the long run


The Manipal Hospitals-TPG’s acquisition of Fortis Healthcare failed to cheer the Fortis shareholders as the shares dropped 13.37 percent on Wednesday as the contours of the deal emerged.

As per the deal – Fortis hospital division will be hived off and merged with Manipal Hospitals, apart from that it will sell a majority stake in its diagnostics unit SRL to the same group. Manipal-TPG will invest Rs 3,900 crore to buyout SRL Diagnostics and acquire hospitals owned by Religare Health Trust (RHT). Fortis will get an immediate injection of Rs 720 crore with sale of its 20 percent stake in SRL.

The transaction will lead to the listing of Manipal Hospitals as the largest healthcare provider in the country by revenue. Each Fortis Healthcare shareholder will get shares in Manipal Hospitals in the ratio of 10.83 for every 100 held.

Fortis hospital business is valued at Rs 5,000 crore and Manipal Hospitals is valued at Rs 6,000 crore.  Fortis hospital revenue stood at Rs 3,727 crore with EBITDA margin of 13.5 percent for the nine months ended December, while Manipal Hospitals revenues were at Rs 1,503 crore at 16 percent margin in the same period.

Fortis has 34 hospitals with operational bed capacity of 4,685, on contrary Manipal has 11 hospitals with 2,973 beds.

Several analysts Moneycontrol spoke to said Fortis shareholders may have got a raw deal, but considering the messy circumstances that Fortis is in – the merger probably was the best possible option for shareholders in the long run.

“It’s a good deal, but a bad valuation (for Fortis shareholders)” said an analyst who tracks the company who didn’t want to be named citing his company’s policy. “Manipal (Hospitals) will emerge as a strong company from this deal,” the above analyst said.

“My disappointment slightly is on the valuation and the residuary shareholding of Fortis Healthcare which will be shell company going forward,” said Shriram Subramanian of InGovern Research – the Proxy advisory and corporate governance firm.

“It’s a big relief that there is a home for assets, and there is better quality promoter and there is quick closure of the entire issue,” Subramanian added.

Amit Tandon of Institional Investor Advisory Services (IiAS) concurs with Subramanian. “The valuations may not have met expectations of some shareholders but look if the transaction were to happen, no one is going to merge the (Fortis) business with themselves given all noise and the developments, it’s too risky for them,” said Tandon said.

Fortis CEO Bhavdeep Singh defended the deal.

“I don’t think it is undervalued, I don’t think it is overvalued. I don’t think anybody got long side of the stick here,” Singh said.

“I don’t think you have to look at mergers like this – look at ratio and say good deal or bad deal.  You have to really think about what’s the implication going forward,” Singh added.

“The fact that we spent so much time with investors. We focused on some of these issues that have taken place – starting with (allegation of overcharging) incidents have happened in Max, Medanta and at Fortis. The noise around internal issues, primarily driven by the promoters and by the group issues. We had to struggle. We have not been able to focus on our business, our Q2 and Q3 results were published recently. We need to get back to focus on our business. We need to get back to focus on our patients,” Singh said.

Link: Money Control- March 29, 2018