The Big Fight for Fortis

As the Singh brothers disappeared from the picture, day by day, the list of suitors only got longer for Fortis Healthcare. The hospital chain which got its first bid from the TPG-Manipal combine on March 27, is sitting with four more offers from Malayasia’s IHH Healthcare, China’s Fosun Group, the promoters of Dabur and Hero Group and KKR-backed Radiant Life Care. Not bad for a company that has been controversy’s favourite child. To be sure, the initial bids offered were between Rs.155 per share and Rs.165 per share but it was the varying deal structures that made the choice a lot more complex. But as the number of bidders started to increase, it was raining revised bids for Fortis.

Also thanks to the board’s decision to only examine binding bids, IHH and Radiant were quick to revise their offers to binding bids. Fosun who offered to infuse Rs.100 crore in the next 45 days and Rs.2,300 crore after completion of due diligence, was the only bidder that didn’t revise the offer and is out of contention since the bid remains non-binding.

The simplest of the offers is the one from the Dabur-Hero Group that proposed an equity infusion of Rs.1,500 crore in two tranches. In return, it has demanded board seats, waiving of the need for due diligence and retaining the current structure. IHH proposes to infuse Rs.650 crore (Rs.160 per share) into the company for Fortis to meet its immediate payments in return for two board seats and the balance Rs.3,350 in three weeks time after completion of its due diligence. TPG-Manipal combine hopes to become third time lucky with its third revised offer (around Rs.161 per share) which is 25% higher than its initial offer made on April 10. In addition, Manipal Hospitals has agreed to buy 5% additional stake in SRL from Fortis apart from buying out the private equity investors. It will arrange for Rs.750 crore funding from banks which will help Fortis in its immediate payments crisis. Radiant Life Care has offered to buy Fortis Mulund for Rs.1,200 crore in a binding offer which will inject the much needed liquidity of Rs.680 crore. Part of its non-binding offer includes a spin-off of SRL and running a competitive sales process for the company and hiving off the hospitals business into a separate company. Depending on the value that SRL fetches (Rs.4,000 crore-4500 crore), FRL offer value from Radiant will range between Rs.170-175 per share

The Fortis saga so far has seen more twists than a Balaji Telefilms’ saas-bahu soap opera. And the story is far from over. The company sought the help of an advisory committee headed by Deepak Kapoor, former PwC India chairman to evaluate the bids. The advisory committee had to submit the bids by April 25. But since one of its members Renuka Ramnath, founder of private equity firm, Multiples Alternative Asset Management submitted her resignation due to ‘her pre-occupation’, the advisory committee couldn’t come up its recommendations. In the board meeting today, Fortis has indicated that the position will be filled with a person of eminent repute in the board meeting which will also have some new faces. Irked with the board that it wasn’t exploring all the options on the table, National Westminster Bank and East Bridge Captial, who together hold more than 12% stake, has asked for the removal of Brian Tempest, Harpal Singh, Sabina Vaisoha and Tejinder Singh Shergill. It is seeking the appointment of three independent directors of their own and has called for an EGM to put the proposal to vote. The board has now invited the three independent directors to join the deliberation and discuss the proposals. It now wants to quickly expedite the sale process which has been going on for a year-and-a-half taking their attention from the core operations which has anyway taken a hit due to promoter issues. CEO Bhavdeep Singh admits that promoter issues have influenced the company’s overall operations. “From a business and valuation perspective, there has been an undeniable impact,” says Singh. The hospital revenue growth at 5% was much lower than Manipal’s average growth of 27% and Apollo’s growth of 13% during the past two years.

Like TPG, IHH has been eyeing Fortis for some time now. In fact, IHH was in talks with Fortis last year but the deal fell through as they grew wary of the promoters’ ongoing litigation with Daiichi Sankyo. After its greenfield project made no headway since it began over 10 years ago, IHH invested in two Hyderabad-based firms — Global Hospitals and Continental Hospitals, to increase its footprint in India. That’s why despite promoter woes and possible contingent liabilities, Fortis is an asset that many are willing to fight over because it would take several decades to establish the network Fortis has given the regulatory approvals required and delay in government approvals in procuring land and for construction.

The offer from TPG-Manipal is binding and strategic in nature. While the hospitals business will be merged into Manipal hospitals and both shareholders will almost have share in the merged entity, it will float rights issue of Rs.4,000 crore which will be underwritten by the TPG-Manipal combine. Ranjan Pai, chairman, Manipal Group is confident of turning the operations in Fortis real quick. “We have drawn up a plan to turnaround the asset in the first six months. The deal offers us significant economies of scale. Through streamlining operations and better sourcing of pharmacy supplies and consumables, we can bring about Rs.150-200 crore of cost savings,” he says. Leveraging the network of doctors will bring in additional revenue too. In the hospital business, doctors are the most important asset and form the largest cost component (22-24% of overall revenue) and there is scope for improvement here. For instance, Manipal’s revenue per doctor is about Rs.1.36 crore whereas, at Fortis, it is Rs.0.73 crore. Besides, they have complementary skills sets, with Fortis being strong in cardio and Manipal in oncology.

Radiant Life Care which runs two specialty hospitals in Delhi and Mumbai, armed with a $200 million by private equity major KKR has made a similar offer where the hospital business is carved out to a separate company where Radiant will pick up a 26% in the new company apart from underwriting a rights issue of Rs.4,000 crore to buy out the RHT assets and has prescribed the highest value so far. While the outcome of the board meeting is still awaited, TPG-Manipal offer is more comprehensive and has a definite strategy for a turnaround. It has probably been the most persistent bidder and the combined entity will have a more a national presence. While it ranks among Singapore’s best, IHH’s presence is much smaller in India and hasn’t really managed to make a dent in the domestic market. Radiant Life Care is still a two-specialty hospital gig. So Fortis is a bigger catch for them. But given its larger domestic presence, Manipal-Fortis becomes a stronger combine to reckon with. But it is finally the shareholders who will decide on which bid wins. And rightly so. They are likely to make sure all options are evaluated by the new board of directors that has equal representation from their side. Things will come to a head at the EGM in May and the board-shareholder tussle is far from over at Fortis. As Shah Rukh would say, Picture abhi baaki hai mere dost!