IHH to inject RM2.3b after Fortis stake win

Deal will add 4,500 hospital beds to IHH’s current 1,600 in India

by MARK RAO / pic by MUHD AMIN NAHARUL

IHH Healthcare Bhd has won the race to purchase cash-strapped Fortis Healthcare Ltd, but the operational challenges ahead are underpinned with big opportunity to grow the business.

The deal will add some 4,500 hospital beds to IHH’s current 1,600 in India as Fortis is the second-largest private hospital in the country with 34 hospitals locally and abroad.

India allowed 100% ownership in the hospital business since 2000 as government spending stagnated. The country only has seven hospital beds for every 10,000 people, which translates to 65%70% average occupancy rates at large hospitals, news reports stated.

The healthcare sector in India is set to get a boost from the government’s new healthcare insurance scheme for the poor and the growth of medical tourism.

IHH emerged as the preferred bidder as its indirect wholly owned unit, Northern TK Venture Pte Ltd, agreed to subscribe to 235.29 million shares or a 31.1% stake in Fortis for RM2.35 billion or 170 rupees (RM9.98) a share last Friday.

The deal will trigger a mandatory open offer for a further 197.02 million shares or a 26% interest in the company at the same price. The acquisition will also result in a mandatory cash open offer for a 26% stake (4.89 million shares) in Fortis’ listed subsidiary, Fortis Malar Hospitals Ltd, at 58 rupees per share, valuing the unit at RM64 million.

The RM2.35 billion offer will be in the form of an equity infusion to address Fortis’ immediate liquidity concerns, while providing enough capital for a long-term buy-out plan.

“In terms of the immediate cash infusion, this exercise provides ample liquidity for Fortis,” IHH MD and CEO Dr Tan See Leng (picture) said in a teleconference last Friday. “I think Fortis is really tight in terms of its ability to get credit lines to cover overhead costs such as rental and employee wages.”

He said the equity injection will address these immediate concerns, as well as help Fortis renegotiate some of its credit lines and bring in specialists for higher earnings’ potential.

The cash infusion will also help Fortis buy out the assets of RHT Health Trust and the private-equity minorities of its unit, SRL Ltd, as part of the group’s long-term plans.

This is part of IHH’s 100-day turnaround plan to help the loss-making company and to restore normality to day to-day operations.

Fortis founders Malvinder and Shivinder Singh lost their shareholding in the company earlier this year due to debt and alleged embezzlement of company funds.

IHH’s accepted offer values Fortis at RM5.21 billion and the offer price of 170 rupees per share represents a 19.5% premium to Fortis’ share price on July 12 this year — a day before the agreement between the two parties was inked.

Dr Tan said IHH’s offer price is not at a very high premium despite the company assuming a controlling stake.

“It is generally accepted that to take control of an asset, you need to pay some sort of a controlling premium,” he said.

He added that the due diligence conducted and audited accounts provided helped identify the key risks associated with the Fortis deal, which were subsequently factored into the offer consideration.

IHH currently manages some 49 hospitals in nine countries across the globe. India is the company’s fourth home market and the Fortis acquisition will expand its exposure to the country from 6% to 24%, while bringing total hospitals under its management to 83.

IHH currently operates hospitals in Kolkota, Hyderabad, Chennai, Bengaluru and Mumbai. Group revenue is further expected to rise to RM13.99 billion from RM11.31 billion per annum.

The Fortis deal represents a shift for IHH from greenfield growth to brownfield acquisitions due to Fortis’ sizeable landbank and available infrastructure. The acquisition is slated to be completed by the fourth quarter of this year and will be funded by a mix of internally generated funds and borrowings.

IHH’s net gearing is also expected to rise from 0.31 times to between 1.4 times and 2.1 times if the all proposals go through, accounting for Fortis’ overall long-term debt.