Pharma weekly wrap: IHH may get its offer approved, but getting Fortis back on track remains a challenge

This past week saw Fortis Healthcare's board recommend IHH Healthcare's bid for a stake in the company to its shareholders, bringing the curtains down on a saga that began in February.

Malaysian healthcare provider IHH Healthcare outbid the Manipal-TPG consortium to emerge as the winner in the race for Fortis, with a binding offer to invest Rs 4,000 crore by way of preferential allotment.

The allotment will take place at Rs 170 a share, which is at a 20 percent premium to Fortis' current market price.

Manipal-TPG offered to infuse Rs 2,100 crore by buying shares through a preferential allotment at Rs 160 per share. It also offered to buy out the stake held by private equity investors in Fortis' subsidiary SRL Diagnostics for Rs 1,134 crore.

But where IHH Healthcare scored over Manipal-TPG, according to the board's own submission, is the simpler nature of the transaction and the requirement for fewer approvals and a shorter timeframe to consummate the deal. Of course, it also happened to be the highest available bid.

Also read: Fortis board unanimously approves Rs 4,000 crore IHH Healthcare bid

To consummate the deal, the IHH offer will now need the approval of Fortis' shareholders and the Competition Commission of India (CCI). According to the Fortis board, all this should not take more than 75 days.

This time it is highly unlikely that there will be any backlash against the board for its decision to back IHH's offer, despite valuation at which the transaction is taking place being low.

The company's current board was nominated by its minority shareholder East Bridge Capital, and was backed by Yes Bank. East Bridge Capital owns around 12 percent stake in Fortis, while Yes Bank own around 15 percent.

The board had to overturn its earlier decisions to back the Manipal-TPG consortium's bid, and later the Munjal-Burmans' offer, due to opposition from some large shareholders. Even the bidders, who were outright in their criticism for board's decision, have largely reconciled.

"We respect the Fortis Healthcare board’s decision and wish IHH well," said Ranjan Pai, Chairman of Manipal Hospitals. He said Manipal will now actively review a range of opportunities across the healthcare sector.

"In our view, our own offer for Fortis reflected a comprehensive analysis of the risk and reward of the business," Pai said.

Sunil Kant Munjal, Chairman of Hero Enterprise, and Anand Burman, Chairman of Dabur India, both of whom withdrew from the race for Fortis at the last minute, have congratulated IHH for their successful bid.

"Fortis is a great national asset, and we hope that IHH would bring its global capabilities to India, and will take Fortis to new heights," the duo said in a statement.

Both Munjal and Burman hold around 3 percent stake each in the company.

Fortis' erstwhile promoters Malvinder Singh and Shivinder Singh, referred to commonly as the Singh brothers, have welcomed the Fortis board's decision.

"We are very happy to note the successful completion and selection of IHH as the partner for Fortis. We wish IHH and Fortis the very best in their new partnership," the brothers said in a statement.

The brothers hold around 0.77 percent stake each in the company.

Challenges ahead

The immediate challenge for IHH is to prevent any further deterioration of Fortis' financial and operational performance.

Fortis posted a net loss of Rs 932 crore in Q4FY18, largely due to provisions and impairments, but the company's operational performance has been under pressure as well.

The earnings before interest, tax, depreciation and amortisation (EBITDA) margin of the company's hospital business, which constitutes four-fifths of its revenue of Rs 4,537 crore, has been flat at 12.1 percent.

The diagnostics business saw a sharp drop in EBITDA margin from around 20 percent a year ago to 15.6 percent in Q4FY18.

There has also been a steady drop in occupancy levels. In the March quarter, occupancy levels dropped to 65 percent, the lowest in the company's recent history.

IHH's CEO Dr Tan See Leng in an interview to Moneycontrol told that his immediate priorty is to stabilise and secure Fortis.

Also read: IHH CEO says top priority is to stablise and secure Fortis Healthcare

Tan said IHH has developed a 100-day turnaround plan to improve the operating margins by around 500-600 basis points.