Fortis Healthcare: Three bids later, investors see no windfall
Multiple bidders for an asset are a good sign for the owners, as getting a good price is virtually certain. Except if the asset in question happens to be Fortis Healthcare Ltd.
Three offers are on the table now. The valuation of a Fortis share does not materially vary in the offers, but the deal structures are very different.
Let’s look at the latest bid. The Hero Investment Office (Munjals) and the Burman Family Office (Burmans) have got together for a surprise joint offer. This offer is in two stages. Initially, the Munjal-Burman combine will invest Rs500 crore as fresh equity in Fortis, at a price of Rs156 a share or more. At Rs156, it will get a 5.8% stake, taking its total stake to 8.8% since it already has a 3% stake. They have asked for one board seat in return.
In the second stage, they will invest another Rs750 crore as fresh equity, but after doing due diligence and at a price to be decided later. What if due diligence leads to revelations that affect the share price? A lower price means higher dilution. If they invest Rs750 crore At Rs156/share, their stake could increase to 16.8% but if the price halves, their stake could increase to 23.7%.
The Munjal-Burman bid says it wants to ease Fortis’s tight liquidity situation. What is not clear is the longer term plan for the company. Who will provide funds for the Rs4,650 crore that Fortis needs to acquire its hospital assets from RHT Business Trust? Minority shareholders would also like to see the company pass into a stronger owner’s hands.
The second offer from IHH Healthcare Bhd could have ticked that box. It is a large foreign healthcare services provider with a market capitalization of $13 billion, and considerable experience and expertise in healthcare.
But IHH has proposed a price of up to Rs160 per share and with the condition of doing due diligence before it goes ahead. Its letter does not mention what stake it intends to acquire. The price is not a significant premium to the current price or the other offers. Due diligence implies a delay and possibly even a downward revision in the offer price. That makes it a risky proposition for the Fortis investor.
That brings one to the first bidder, Manipal Health Enterprises Pvt. Ltd with the backing of private equity firm TPG. They have a revised and binding offer on the table, without due diligence as a precondition. This offer gives Fortis’s shareholders more shares in the new listed entity that will house the hospitals business, leave Fortis as a listed diagnostics company. It also lowers the investment requirement of the Manipal-TPG combine. If all goes well, shareholders will have shares in two listed companies, and in the hands of better management, valuations should improve.
Investors are left comparing three very different bids. Of course, it is entirely possible that the bidders have not played all their cards yet. This week should see the next phase play out. IHH has given the Fortis board till the evening of 18 April to respond. After that, it could make an open offer if the board rebuffs its bid. Manipal Health has given a 7-day deadline to accept its revised offer that will end on 17 April. After the deadline, the original offer from Manipal Health will remain valid.
The board has an important role to play in these deliberations. It has shrunk in size after the promoters resigned and some independent directors left too. The cloud over the company have cast a shadow on the board as well. They need to demonstrate they are acting in the best interests of all shareholders.