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India's troubled Fortis picks IHH as its preferred suitor

IHH, Asia's largest private healthcare operator, will acquire a controlling stake in India's second largest hospital chain

After a fierce 16-month bidding war for the control of the troubled Fortis Healthcare, IHH Healthcare has beaten four contenders to the prize - India's second largest hospital chain.


AFTER a fierce 16-month bidding war for the control of the troubled Fortis Healthcare, IHH Healthcare has beaten four contenders to the prize - India's second largest hospital chain.

The final rival it pipped was TPG-Manipal Hospitals, in a race that could see it pay some RM4.3 billion (S$1.45 billion) tops.

It has been a long journey with many twists and turns, but there is a lot more work to be done, said IHH managing director and chief executive Tan See Leng, who described the deal as "transformational".

India-listed Fortis' board picked IHH, Asia's largest private healthcare operator by market value, as the preferred bidder to acquire a controlling stake in the hospital operator through a combination of primary equity infusion and purchase of shares from public shareholders at an offer price of 170 rupees per share.

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This overshadowed TPG-Manipal's bid pegged at 160 rupees apiece, including an equity infusion that would have raised merely half of what IHH had proposed.

All that is left is for Fortis' shareholders to bless the deal for IHH to muscle up on its pan-Indian portfolio and to expand the operations from south India - where it now predominantly operates - to the north of this under-insured, under-served and highly-populated sub continent.

CGS-CIMB Research analyst Ngoh Yi Sin said: "Fortis is attractive to IHH based on its extensive presence, integrated healthcare service offerings and alignment with IHH's brownfield strategy."

IHH, in pursuit of Fortis for over a year, had dug its heels in on the quest despite having been rebuffed in early May by the Fortis board, which had instead recommended a bid by India's two prominent families.

A renewed Fortis board that set tough conditions for potential bidders and launched a fresh round of bidding sometime at the end of May turned the tide for the healthcare firm, which is controlled by Malaysia's sovereign wealth fund Khazanah Nasional.

Under the exercise, IHH will subscribe to new Fortis shares for 40 billion rupees (RM2.3 billion). This represents a 31 per cent stake through a preferential allotment, which will turn IHH into Fortis' majority owner.

This would immediately help tackle the Indian firm's cash-strapped state; aside from a credit crunch, it is hamstrung by legal woes and being probed for financial irregularities.

The Malaysian and Singapore-listed IHH will also make an open offer worth 3,349 crore rupees (RM1.966 billion) to acquire 26 per cent of Fortis from public shareholders, hence providing them with a cash exit opportunity at a minimum offer price of 170 rupees apiece.

Assuming full acceptance of the open offer, IHH will hold a 57.1 per cent controlling stake in the ailing Fortis.

As the acquisition of control in Fortis will change the control of Fortis Malar Hospital, an Indian-listed subsidiary of Fortis, IHH will make a separate cash open offer to acquire 26 per cent of Fortis Malar for a total 29 crore rupees (RM17 million).

Considering that the bid price offers a premium of 20 per cent to Fortis' market price on July 12 (pre-announcement) and was higher than its original offer of 160 rupees apiece - IHH had later upped its offer price to 175 rupees followed by the final binding offer of 170 rupees a share - could IHH be overpaying for the asset?

Dr Tan replied: "We don't think so. It's accepted that we need to pay a premium for control."

Analysts agree with him.

Ms Ngoh said: "Overall, I think the offer price for Fortis was fair, given that it is similar to the pricing from other bidders."

She added that the offer has an implied valuation of 17.7 times of FY18's Ebitda (earnings before interest, taxes, depreciation and amortisation).

The entire exercise will be paid for in cash - RM2.7 billion from internally-generated funds and RM1.6 billion from external borrowings. The transaction is expected to be done and dusted in the fourth quarter of this year.

The exercise will tackle Fortis' cash crunch and ensure it has adequate capital to execute its long-term strategic vision, including the buyout of assets of Singapore-listed RHT Health Trust, said Dr Tan.

Ms Ngoh remarked: "We think the Fortis healthcare assets are attractive, but would need some time and much effort to turnaround operations and extract synergies. This would also be part of IHH's target of having India contribute 20 per cent of its overall revenue."

IHH stock jumped one Singapore cent or half a per cent to finish at S$2.02 on Friday; it resumed trading following a trading halt earlier in the day, pending the announcement.

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