The ongoing due diligence process on Fortis Healthcare by the suitors in the race currently has reportedly thrown up some unexpected skeletons in the closet. Citing sources Mint today reported that the scrutiny has unearthed unpaid vendors' bills of Rs 450 crore, a penalty on FHL's subsidiary Fortis Escorts Heart Institute that's to the tune of Rs 503 crore, as well as undisclosed land-related issues at three of its hospitals.
Earlier this month, Fortis Healthcare had shortlisted four entities - the Munjal-Burman combine, Manipal-TPG consortium, Malaysia's IHH Healthcare Berhad and Radiant Life Care - to participate in a fresh round of bidding after some participants contested the board's original choice.
Interestingly, the criteria of the fresh bidding process mandated that the buyers have to make a minimum investment of Rs 1,500 crore into FHL by way of preferential allotment apart from having a plan for funding the acquisition of RHT Health Trust (RHT) and a plan for providing exit to private equity investors of diagnostic arm SRL. Furthermore, the submitted bids had to be unconditional and clearly mention about the source of funds for the transaction. The participants reportedly have to complete their due diligence processes by June 10 and make fresh offers by June 14.
But the newly discovered skeletons in FHL's closet may weigh down its valuation in the rebidding. The healthcare major was earlier valued at Rs 180 per share by Manipal-TPG.
"Due diligence may pull down the valuation. Also, the company's performance has deteriorated. There are some land-related issues with the Gurgaon hospital, apart from similar issues at hospitals in Malad and Vashi (Both in Mumbai). I do not expect the fresh bidding to be too high," a contender for FHL's assets told the daily.
Then there is the hefty Rs 503.36 crore penalty slapped on Fortis Escorts Heart Institute (EHIRCL) by the Directorate General of Health Services on May 29 on charges that it was making unreasonable profits. According to the report, FHL's buyer will be saddled with it.
FHL's looming woes don't stop at lower valuations. Sources told the daily that some of its lenders are considering dragging it to bankruptcy court in an attempt to recover their dues.
However, Fortis has refuted these charges. "In the normal course of business, there are vendor payments due at any point in time with some delays. These are cleared as soon as possible in an appropriate manner. Also, we are not aware about any creditor/s moving to NCLT to recover their dues," the company's spokesperson told the daily.
In addition, in a regulatory filing on June 6, FHL said that a writ petition has been filed by EHIRCL at the Delhi High Court challenging the penalty order. FHL had added that the "court has stayed the order passed by the Special Committee, subject to deposit of Rs 5 Crore within 3 weeks and has directed that no coercive action shall be taken against EHIRCL till the next date of hearing i.e. December 6, 2018".
But that is at best a breather for the company, not an escape. The big question is whether FHL's shareholders need to worry about the near future.