Fortis Healthcare picks Malaysia's IHH Berhad's bid over TPG-Manipal at Rs 170 per share

Cash-strapped Fortis Healthcare Limited (FHL) has finally selected a suitor and, this time round, it is a unanimous decision. Early this morning, in a regulatory filing, FHL disclosed that its board had decided to recommend the binding investment proposal from IHH Healthcare Berhad (IHH) to invest Rs 4,000 crore by way of preferential allotment at a price per share of 170.

"On July 3, 2018, the Company received 2 binding proposals from IHH and TPG-Manipal consortium and the Board after considering the merits of both the bids and taking into account the recommendation of its Financial Advisors (Standard Chartered Bank and Arpwood Capital) and considering the legal advice from Legal Advisors (Luthra & Luthra Law Offices and Cyril Amarchand Mangaldas), is approving IHH's offer," FHL said in a statement today.

According to Ravi Rajagopal, Chairman, Board of Directors, the winning bid offers "a more strategically and financially compelling proposition along with simplicity and certainty". He added that "the release of the Audited FY 2018 financial statements was a key milestone in underpinning the overall success of the transaction".

Here are the other salient features of the IHH bid:

- Mandatory Open Offer to the public shareholders of Fortis as per the SAST Regulations for 26 per cent of the outstanding shares post issuance. The price for this will be Rs 170 per share or the price determined under Regulation 8 of SAST Regulations, whichever is higher. Significantly, this will give an exit option to the minority shareholders.

- Mandatory Open Offer for public shareholders of Fortis Malar Hospitals Limited at a price as determined under Regulation 8 of the SAST Regulations

- The proposal provides for refinance of debt to the extent of Rs 2,500 crore

IHH has also made it clear that the funds infused have to be deployed towards "completion of acquisition of assets of Religare Health Trust (RHT), SRL private equity minority shareholders and [meet] short-term liquidity needs". The Singapore-based Religare Health Trust owns some of FHL's assets while SRL is its diagnostics arm, of which the private equity shareholders own about a third.

In comparison, the binding bid submitted by Manipal-TPG had offered to infuse Rs 2,100 crore through subscription to the preferential allotment at a price of Rs 160 per share. The proposal also included buying out the PE investors of SRL for Rs 1,134 crore and a plan for completing the acquisition of RHT assets.

The IHH offer, according to FHL, not only bested the rival offer but is also at a 20 per cent premium to current market price and a 30 per cent premium to unaffected price as of July 2. Moreover, the offer price of Rs 170 per share is close to the 52-week high level of Rs 171.35, hit on January 3, 2018 on the BSE. The other key factors listed by the company for picking this bid is that it offers "significant deal certainty given a simpler transaction structure and requirement for fewer approvals and a shorter timeframe" and it takes care of its immediate liquidity concerns.

That apart, given that IHH is one of the largest healthcare groups in the world by market capitalisation, its proposal "offers potential to achieve scale driven synergies on operational and financing front".

According to FHL, the next step is to call for a shareholders' meeting at the earliest and seek their approval for the winning bid. "The transaction is expected to be completed within 7 business days of receipt of shareholder's and CCI's approval which will be obtained concurrently with shareholder's approval and can take approximately 60-75 days," the company added in its statement.

Reacting to the news, FHL's stock had spiked about 4 per cent to Rs 147.90 apiece on the BSE earlier this morning but is currently trading lower at Rs 142.90. The stock of Fortis Malar Hospitals fared even better, shooting up over 11 per cent to Rs 57 apiece and is currently trading at Rs 54.95.

For IHH, this development has been a long time coming. The Malaysian chain had pursued FHL over a year back but talks fell through in early 2017, in the wake of Daichhi Sankyo's court battle with the Singh brothers, the former promoters of the company. This time, too, IHH had repeatedly sweetened its offer to remain in the race, which is understandable since acquiring FHL will allow it to rapidly expand its presence in India, a lucrative healthcare market.

"The proposed partnership with IHH presents exciting opportunities for Fortis while also delivering a number of synergistic avenues for the business. There is no doubt that the last twelve months have been challenging for us, however, I am confident we can collectively re-energize the entire organization," said Bhavdeep Singh, FHL's CEO. "In addition to exchanging best practices and driving topline growth, we look forward to focusing back on our core business of providing world class healthcare services across India."