Manipal's Ranjan Pai says revised offer is based on Fortis investors' feedback

The Manipal-TPG consortium Sunday made a revised offer for Fortis Healthcare, valuing the company at Rs 8,358 crore, or Rs 160 per share, and said it will invest Rs 2,100 crore upfront in the healthcare services provider as part of the deal.

According to the terms of the latest offer, Manipal Hospitals will merge with Fortis Healthcare, as against the earlier proposal to demerge Fortis’ hospitals business and merge it with Manipal Hospitals.

In addition, the consortium offered to buy the 30.93 percent stake held by private equity firms in SRL Diagnostics at a price that values the Fortis subsidiary at Rs 3,600 crore.

Manipal and TPG together will be investing around Rs 3,300 crore in the deal for Fortis Healthcare, of which Rs 2,100 crore will be invested in the company and Rs 1,200 crore will be used to buy private equity investors’ stake in SRL Diagnostics.

The Manipal-TPG revised offer hasn’t set any fireworks for Fortis investors in terms of valuation – but it tried to simplify the structure and put more money on the table upfront compared to other investors.

The bids of other investors, while they appear higher in valuation compared to Manipal-TPG, were complexly structured offering differential valuation and conditions of due diligence.

IHH Healthcare offered to invest Rs 650 crore upfront at valuation of Rs 175 per share, the balance  Rs 3,350 crore is subject to due diligence, Munjal-Burmans bid  proposed to invest Rs 800 crore for Rs 167 per share and balance Rs 1,000 crore via preferential warrants at Rs 176 per share and KKR-backed Radiant Life Care  made an offer of Rs 165 per share.

In an exclusive interview to Moneycontrol over the phone - Ranjan Pai, Chairman of Manipal Education and Medical Group (MEMG) that owns Manipal Hospitals – said the latest revised bid was made after taking feedback from the investors and expressed confidence about clinching the deal with Fortis.

Below are the excerpts of the telephonic interview

Q. It was widely believed that you will outbid other bidders on price, exercising your right-to-revise option, but your revised bid offers same valuation – what’s your take on it?

A. Our valuation in the earlier offer was also around Rs 160 (per share), the biggest change (in the revised bid) is the structure which is more directly into the company. I think this is a structure that investors have always wanted and liked, that's the feedback we got. And from the valuation perspective, it's similar. We have seen the company, we have done the diligence and we think this is fair value for the company.

We also know what the other bidders are putting. We think it's a compelling bid. It provides full funding for the company including RHT and we are also taking out the obligation from Fortis which has a put option to buy out private equity shareholders in SRL (diagnostics subsidiary of Fortis).

(Put Option refers to an option to sell assets at an agreed price on or before a particular date. If the agreement is not honored it may lead to litigation)

Q. Will the price be a setback for your chances in the race?

A. Our bid Rs 160 per share, and other people said it is Rs 175 and Rs 167. But IHH (Healthcare) bid of Rs 175 is not fully binding bid, it's only for Rs 650 crore, the balance Rs 3,350 crore is subject to due diligence - so we don't know where that number will end up after diligence. The Munjals (and Burmans) bid – said they will be putting Rs 800 crore for Rs 167 per share and - the balance Rs 1,000 crore via warrants at Rs 176 per share. So warrants can go on depending on what's the time value of money. So everybody in the same ballpark from a price wise. Honestly, it's not about one or two rupees or five or six rupees. The investors now have to think who can create the best long-term value. The synergy potential (of a deal between Manipal and Fortis) is around Rs 200 crore in the next two years, or Rs 40 per share of value for Fortis shareholders in addition to the Rs 160 per share offered.

Q. How confident are you about clinching the deal with Fortis?

A. I continue to remain confident. I think investors will see the rationale for our bid. I think they also see the rationale for putting these two companies together. In an industry that's facing a lot of headwinds, it's time to put the consolidation in the wheel. This is the right time. More importantly for Fortis - we are not just investor but we are promoters. So I think - this deal that we are proposing ticks all the boxes.

It provides liquidity, it provides full funding, and it provides a promoter to guide the company through next several years. We are not delineating any assets, we are keeping SRL with ourselves. I think from medium to the longterm perspective we can pick up the bellwether for the healthcare industry.

Q. After the latest bid, you offered to invest around Rs 3,300 crores in Fortis Healthcare, so how are you planning to fund that amount?A. We both are putting in a similar amount of money into the company. We are putting half (of Rs 3,300 crore) and TPG is putting (the rest). We have a combination of internal accruals and debt.