IHH committed to Fortis offer despite court ruling

by MARK RAO/ pic by BLOOMBERG

IHH Healthcare Bhd will proceed with the Fortis Healthcare Ltd open offer once the stay is lifted by India’s Supreme Court, as the healthcare group has already secured board control in the Indian hospital operator — thus minimising operational risks.

IHH move to raise its stake in Fortis — India’s second-largest hospital chain — hit a snag after the country’s Supreme Court found Fortis founders, Malvinder Singh and Shivinder Singh, guilty of contempt of court and said similar proceedings could commence against Fortis itself.

The stock rose 21 sen or 3.9% to RM5.56 despite the news. This court ruling effectively halts IHH’s open offer to Fortis’ shareholders to increase its shareholding in the company to above 50%.

Recall the Indian court issued a status quo order on the sale of Fortis to IHH on Dec 14 last year, in view of the ongoing legal proceedings.

In November 2018, IHH bought a controlling 31.1% shareholding in Fortis for RM2.4 billion, triggering a mandatory takeover offer (MTO) for a further 26% stake in the company.

The MTO, if it materialises, would trigger another open offer for a 26% interest in Fortis’ listed subsidiary, Fortis Malar Hospitals Ltd (Malar open offer).

In all, IHH could hold up to 57% stake in Fortis if the open offers are executed.

In light of the judgement by the Supreme Court, the Fortis open offer as well as the Malar open offer will not proceed for the time being, IHH stated in an exchange filing yesterday.

“IHH remains committed to proceed with the Fortis open offer once the stay is lifted by the Supreme Court of India. The next hearing date for this matter is Feb 3, 2020.”

IHH added that it is seeking legal advice on the matter. The group added its 31.1% interest in Fortis was undertaken in a fair and transparent manner after obtaining the required approvals and in accordance with applicable laws.

Despite the legal tussle, analysts noted IHH has board control of Fortis and remains the largest shareholder.

In its latest report, Hong Leong Investment Bank Bhd was neutral on the court’s decision to refuse to lift the stay preventing IHH from proceeding with the Fortis open offer.

“If the Supreme Court decides that IHH cannot proceed with the MTO of Fortis, IHH is still the single largest shareholder (31% stake) having five nominated members on Fortis board,” its analyst Farah Diyana Kamaludin wrote in a report yesterday.

“We understand IHH’s takeover of Fortis has been put on hold since December 2018.”

She added that the potential fine IHH could incur if the court commences similar proceedings against Fortis, as it did against the company’s founders, would be miniscule.

Under India’s Section 12 of Contempt of Court Act 1971, a contempt of court can be punished with simple imprisonment for a term that may extend to six months or a fine which may extend to 2,000 rupees (RM120), or both, she noted.

“The spillover risks, if any, will be more reputational in nature.”

Farah said escalating protest in Hong Kong and the weak Turkish lira are presenting headwinds to IHH and thus lowering her target price on IHH from RM6.02 to RM5.66.

This implies expected value and Ebitda of 18.3 times and 16.3 times for the financial years ending Dec 31, 2019, and 2020 respectively.

IHH is a growing healthcare group globally with 80 hospitals under its portfolio spanning 10 countries such as Turkey and a growing presence in the Greater China market.

AmInvestment Bank Bhd views the court ruling as “slightly negative” for IHH as the Fortis open offer continues to be suspended and thus delaying the takeover process pending a decision.

The research firm maintained a ‘Hold’ recommendation on IHH with an unchanged fair value of RM5.50 based on a discounted cash flow valuation.