Manipal Health sweetens deal to allay Fortis shareholders' concerns

Shareholders of Fortis Healthcare Ltd (FHL) finally have cause to celebrate, with Manipal Health Enterprises (MHEPL) upping the merger offer on the table by 21 per cent. The revised proposal values the hospital business of FHL at Rs 6,061 crore, which is Rs 1,058 crore more than its equity valuation.

Manipal first offered to buy Fortis last month in a deal that would combine its 14 hospitals with Fortis portfolio of 34 hospitals, creating a formidable rival to Apollo Hospitals Enterprise Ltd. But the previous bid, which offered shareholders 10.83 shares in the combined company for every 100 Fortis shares held, was panned by investors. Investors, including East Bridge Capital and Elliot Management, objected to the valuation of Rs 5,003 crore for FHL and Rs 6,070 crore for Manipal Hospitals. It knocked Fortis stock down over 13 per cent on the day the deal was announced.

According to the company, in its revised binding offer, existing Fortis shareholders will roughly own half of the new company. That's not all. The revised terms, as spelt out in the letter that MHEPL sent to FHL's board of directors yesterday, also dangles a rights issue as a carrot. MHEPL said that it will "look to undertake a rights issue for an amount of up to Rs 4,000 crore after completion of the demerger" to provide an opportunity to all shareholders to infuse fresh capital into the company.

MHEPL has also dropped the idea of purchasing equity shares of SRL Diagnostics from FHL, so it will continue to be the latter's subsidiary. The earlier plan was to purchase 20 per cent stake from it. However, MHEPL is still looking to acquire a 30.9 per cent stake in SRL from its existing private equity investors. "A new shareholders agreement shall be entered into between FHL and the Acquirer (Dr Ranjan Pai) ... pursuant to which the Acquirer shall inter alia have the ability to appoint a majority of the directors [on SRL's board]," said the letter. The earlier plan of a Rs 3,900 crore infusion in MHEPL by the Manipal promoter and US private investment firm TPG - which was supposed to fund the purchase of SRL Diagnostics' equity shares - has also been scrapped.

"We continue to believe in the compelling prospects from the combination of the hospital business of Manipal and Fortis," said Ranjan Pai, chairman, Manipal Education and Medical Group, which is the parent company of MHEPL. "We hope our revised offer addresses the concerns raised by certain Fortis shareholders."

Significantly, the letter adds that the revised proposals will only remain valid for seven days - six days to go now, since the letter was issued yesterday - post which all bets are apparently off. Moreover, it makes it clear that "FHL shall not be entitled to accept the revised proposals piece-meal and rejection/non-acceptance by FHL of any of the revised proposals shall be considered a rejection of the all the revised proposals".

If successful, the merger would create one of India's biggest healthcare providers and help resolve an uncertain outlook for FHL, which has had a rough time of late as authorities investigate whether its founders siphoned funds out of the company. Given that the deal spells greater access to India's burgeoning healthcare market - which Deloitte estimates will grow three-fold to $372 billion by 2022 - Manipal will be hoping that FHL takes bait this time round.