SINGAPORE (Mar 20): The Economic Times reported that IHH Healthcare is set to launch a voluntary open offer for Fortis Healthcare. This comes nine months after walking out of bilateral talks with promoters Malvinder and Shivinder Singh who were then in control of Fortis.
"We do not rule out the possibility that IHH could still be interested in Fortis Healthcare despite walking out on the negotiations in mid-2017, as Fortis Healthcare’s share price has fallen some 23% to the last closing price of INR152.55 ($3.08) from INR200," says lead DBS analyst Rachel Tan in a Tuesday report.
Last year, IHH secured a warchest of US$2 billion ($2.6 billion) multi-currency bonds and issued US$500 million of perpetual securities.
Tan says the offer price should take into account Fortis Healthcare's offer to buy out RHT Health Trust for 90 cents each.
On a combined basis, Tan estimates the potential acquisition -- at Fortis Healthcare’s current price and RHT’s offer price -- is at an FY19 EV/EBITDA of 18 times, which is still attractive compared to its historical EV/EBITDA trading band.
And if the acquisition of Fortis Healthcare goes through, an offer will subsequently be made to acquire all assets of RHT.
While the acquisition may elevate IHH’s position to be the second largest hospital operator in India with some 30 hospitals, Tan expects near-term growth potential to potentially moderate due to integration costs.
Although the market could be sceptical given the legal issues and news on the promoters siphoning money have yet to be resolved, Tan notes that IHH has demonstrated its ability to integrate and turn around hospitals as seen in Global and Continental Hospitals, which turned EBITDA positive within one year after the hospital groups were acquired.
To recap, Malvinder and Shivinder resigned from the board of Fortis Healthcare on Feb 8 after being accused of funnelling out US$78 million from the group.
This follows a high court order for the Singhs to pay up to US$550 million to Daiichi Sankyo for allegedly luring the Japanese drug maker into a deal by withholding information.
The resignations were accepted by Fortis’ board on Feb 13. On Feb 15, the Supreme Court allowed financial institutions to sell the pledged shares of Fortis Healthcare by the promoters. Fortis Healthcare’s share price fell 4% to INR137.50 on the news.
The five lenders are Yes Bank, Axis Bank, RBL, ECL Finance and Indiabulls Housing Finance. According to news reports, it is understood that Yes Bank had acquired a 17.3% stake in Fortis Healthcare following the sale.
DBS is maintaining a "buy" on IHH with a target price of RM6.81 ($2.29). "We remain positive on IHH’s growth plans, with a pipeline of new hospitals in China and a potential turnaround in India," says Tan.
The research house and brokerage is also maintaining its "hold" on RHT with a target price of 85 cents despite the latest developments, as the news has yet to be confirmed and there are legal issues surrounding the promoters or Fortis which have yet to be resolved.
As at 2.50pm, shares in IHH and RHT are trading at $2.02 and 78 cents respectively.
