An unlikely hero for Fortis Healthcare

Munjal-Burman’s winning bid for the beleaguered hospital chain raises more questions than answers

Monoj Kumar

After a marathon meeting on May 10 at Fortis Memorial Research Institute in Gurugram that started from 7 a.m. in the morning and ended at 10 p.m. at night, the Fortis Healthcare management picked up the Sunil Munjal-Anand Burman combine among the four shortlisted bidders for the country’s second-largest hospital chain. Brian Tempest, an independent director, in a presser on Friday said the board considered the finalist from the point of view of certainty and liquidity for the country’s second-largest healthcare chain, which is grappling a crisis accentuated by the Singh brothers who have allegedly siphoned off around Rs.500 crore from the company.

As per the Fortis board, the Hero Enterprise Investment Office and Burman Family Office combine will make an upfront equity infusion of Rs.800 crore at Rs.167 a share through a preferential allotment and will invest an additional Rs.1,000 crore through a preferential issue of warrants priced at Rs.176 a share. Post the warrant conversion, the combine will end up with close to 17% stake. The board’s proposal will now be put before an extraordinary general meeting (EGM) of shareholders to be held 30 days from now.

What was rather interesting about the whole bidding drama was the choice of the winner; considering that neither Hero nor the Burmans have any experience in healthcare. Though the Burmans run a health product business in Dabur, it was a rather curious choice considering that the TPG-backed Manipal Hospitals, IHH Healthcare and Radiant Life Care-KKR have the expertise in the healthcare business. Tempest said the board had finalised the bid in consultation with an expert committee, two financial organisations and a legal firm. On being grilled as to how they chose the winner over the more qualified bidders, Tempest had a rather weak explanation. “Hero-Dabur have 30-40 investment in healthcare, have one hospital that has a training college for nurses and to run the business efficiently, we'll need a regular supply of nurses and doctors.”

Not surprising that Manipal Group's CEO Ranjan Pai was surprised by the board’s move. “After many months of engagement with Fortis, including due diligence, we are disappointed that the board has come to this conclusion. Manipal remains of the view that our offer proposed the most appropriate short and long-term plan for Fortis and was in the interests of all stakeholders, including shareholders,” Pai said in a statement on Friday. Later Pai told Outlook Business, “The board has brought in investors but it is not just about bringing in investors but about what they can do with the asset. I believe the company needs promoters who will step, roll up their sleeves and get their hands dirty.”

TPG-Manipal had revised its offer to Rs.161 a share from its first bid of Rs.135 a share. In addition, Manipal Hospitals was to buy 5% additional stake in SRL from Fortis, besides buying out the private equity investors. To help Fortis with its immediate payments crisis, the combine was also arranging Rs.750 crore from banks. Meanwhile, Radiant Life Care had offered to buy Fortis Mulund for Rs.1,200 crore in a binding offer that would have infused Rs.680 crore into the company. As part of its non-binding offer, the diagnostics business housed in subsidiary SRL was to be spun off and sold, besides hiving off the hospitals business into a separate company. Depending on the value that SRL fetches (Rs.4,000 crore-4,500 crore), the offer value from Radiant would have ranged around Rs.170-175 a share. Malaysian healthcare group IHH Healthcare, in return for two board seats, had proposed to infuse Rs.650 crore at Rs.160 a share into the company to meet its immediate payment obligations and the balance Rs.3,350 in three weeks’ time after completion of its due diligence. In fact, during the meeting, three new directors were in favour of the IHH bid, but three old-time directors and two others chose to go with Munjal-Burman offer. “Honestly there is no comparison. Theirs was the weakest bid and they went with it. The board has done a complete disservice for shareholders,” mentions Pai.

Incidentally, minority shareholders were critical of Manipal-TPG’s initial offer, forcing the combine to revise its offer price twice over. There is a possibility that IHH could challenge the shortlisted bid at the EGM. According to reports, the Malaysian company is said to be evaluating options, including approaching shareholders directly. "We remain committed and are currently evaluating our options. We are open to further discussion with all stakeholders, and look forward to the support of Fortis shareholders," Dr Tan See Leng, managing director and CEO of IHH Healthcare, was quoted saying. Manipal Group, however, is unlikely to pursue the deal. “We are not talking to anyone anymore, nor are we revising our offer. It’s now up to the shareholders to reject the proposal if they want to. We are moving on with our expansion plan,” Pai told Outlook Business.

Institutional holding in the company is around 68% with foreign investors holding close to 46% stake, domestic institutions holding over 17% stake and mutual funds holding close to 5%. Among FIIs, WF Asian Smaller Companies Funds, East Bridge Capital and Societe General holding close to 11%, and of the domestic institutions, Yes Bank owns over 15% stake and Axis Bank holding close to 2% stake. Yes Bank and Axis Bank chose not to participate in the story. In fact, Yes Bank’s equity holding follows a revocation of a pledge given by the erstwhile promoters for securing a loan of Rs.1,500 crore. While the promoters have pledged some real estate for availing the loan as well, a chunk of the loan is now converted into equity. In an earlier media interaction, Yes Bank managing director and chief executive Rana Kapoor had said, “This is a very attractive asset and it will repay all the lenders. The intentions of the board are good and the intentions of the new members of the board are also good and I am deeply convinced that there will be a good resolution on this.”

Fortis Healthcare’s condition is akin to patient on a drip given its deteriorating liquidity position. In fact, Icra in April had downgraded Fortis’ rating given the delay in servicing of a loan not rated by ICRA along with its inability to roll over or refinance the loan. The rating agency had stated that Fortis’ ratings continue to be constrained by concerns pertaining to recoverability of advances extended to related parties, potential impact of various ongoing investigations/litigations, deterioration in operational performance and large payments being made to Religare Health Trust.

Given the dismal state of affairs, Ambareesh Baliga, an independent market expert, believes that shareholders will vote for the Burman-Munjal deal. “Already enough has been lost over the entire bidding process and a further delay would only accentuate the situation. Though the fair value remains between Rs.200-225, the bidders have been taking advantage of the company’s fiscal situation, and it’s unlikely the shareholders would want to put up with more drama.” Whether that would indeed be the case would only be clear 30 days from now.