Cash-strapped brothers Malvinder and Shivinder Singh are in active discussions with private equity group TPG Capital to sell a significant minority stake in Fortis Healthcare. The transaction may also see the folding back of the Singapore-listed business trust into the listed Indian entity, said four sources aware of the transaction.
The quantum of stake sale is yet to be finalised but sources said it will be a minimum of 26%. Beyond that, the acquisition will trigger an open offer for an additional 25% equity. The current market cap of the Fortis Healthcare is Rs 7909 crore.
“Both sides are engaged in bilateral negotiations. There is no formal sale process as yet. In the recent past, they have tried to unlock value through stake sale in the diagnostics arm SRL but that did not yield any result,” said an official involved directly in the ongoing discussions.
Earlier in August, the Fortis group announced plans to restructure its business by hiving off its diagnostic business into its existing listed subsidiary Fortis Malar. Consequently, the group’s hospital business would be housed under the listed company Fortis Healthcare with 63% promoter holding and the diagnostic business under the listed company Fortis Malar (to be renamed as SRL Diagnostics with a promoter holding of 40%). The entire process is expected to complete by the middle of 2017.
If TPG comes on board the consolidated Fortis, then they reorganisation will not go through, or else sources say, TPG may invest in the soon to be demerged hospitals business.
With two large diagnostics players – Dr. Lal Pathlabs and Thyrocare Technologies having been listed on premium valuations in the past one year, it makes the proposition of listing of SRL Diagnostics, the largest player in the category, value accretive for the company. Most industry analysts are in consensus that considering the higher ROCEs for the diagnostic businesses, they should trade at 25-30% premium valuations vis a vis their hospital peers. These listings have also created a benchmark valuation for SRL. Based on the prevailing trends, SRL is approx. valued at ~ Rs 7100 crore as part of the restructuring ; approx. translating into 29-30 (x) forward EV / EBITDA of SRL. This is in line with valuations of Dr. Lal which is quoting around 33-34 (x) forward EV / EBITDA.
“We do not comment on market rumour and speculation. Our focus remains squarely on delivering excellence in patient care and clinical services. Fortis is widely acknowledged as a front ranking company in healthcare with a pan India presence and our entire range of hospitals and diagnostic services continue to exhibit robust growth,” a Fortis spokesperson told ET.
Mails sent to TPG Capital’s global spokesperson did not yield any result till the time of gong to press.
As a fund TPG has been bullish on healthcare having invested Rs 900 crore ($146 million) in Manipal Hospitals in 2005. Along with Temasek, it has also been in the race to acquire south based KIMS hospital chain this year. Its growth fund has also backed mother and child care hospitals Motherhood this July. Interestingly, Fortis’ former CEO Vishal Bali is a senior advisor to the fund and head of Asian healthcare practice of TPG Growth.
HEALTHY GROWTH
Starting off with a single hospital in Mohali in 2001, the company has grown at a fast pace to become the 2nd largest hospital player in the country through a series of internal and international acquisitions. It acquired the Escorts chain of hospitals in 2005, Malar hospitals in Chennai in 2008 and 10 hospitals from Wockhardt. From 2010 through to 2013, the company expanded outside India by buying healthcare assets in Australia, New Zealand, Hong Kong, Vietnam, Singapore, and Dubai. However, rising debt burden compelled the company to forego its international expansion and focus back on India. Between 2013 and 2016, it divested its overseas assets and has been focussing on improving the performance of its domestic business of 45 healthcare facilities with a capacity of 4,600 operational beds and over 300 diagnostic centres.
Currently, a lion’s share of 82% of the revenues of Fortis Healthcare are earned from the hospitals business, while the remaining is contributed by the fast growing and higher margin business of diagnostics. The hospital business generated revenues of Rs 3450 crore in FY 2016 ; which is expected to rise to approx. Rs 3840 crore in FY 2017. The business is currently operating at an EBITDA margin of approx. 6% (estimated for FY 2017). Most Asian Hospitals (including Apollo) quote at forward EV/EBITDA multiples in the range of 22-23 (x).
Loss-making Fortis Healthcare has been steadily improving its performance as its losses are steadily reducing in each of the past three years. Its net sales have grown at a compound annual growth rate of 11% to Rs 4368 crore during this period. The net debt of the company at the end of September stood at Rs 728 crore, representing a net debt equity ratio of 0.15 times, improving from 0.18 at the end of June quarter. The company’s performance in the second quarter was better than the preceding quarters. In the company’s second-quarter earnings call last month, the management expected the company’s business to sustainably grow revenues at a low double-digit rate.
In the hospitals business, the company’s strategy is to grow through increasing bed capacity, launching new clinical programmes and adding more doctors. The company plans to add 400 to 600 beds annually going ahead. In its diagnostic business, the company continues to rationalize its network as well as expanding its offering by an addition of new tests. In the last two years, the company has cut around 550 collection centres to 931 centres now. There has been an increase in the marketing spend on the SRL brand.
CASH CRUNCH
The Singhs were ordered by a Singapore arbitration court in May to pay $385 million in damages to Japan’s Daiichi Sankyo Co Ltd over the sale of Ranbaxy Laboratories for having allegedly withheld information.
The Singh brothers have pledged almost 86% of their promoter holding in their publicly traded diversified financial services platform Religare Enterprises Ltd (REL), as per stock exchange disclosures for the quarter ended September. A disclosure on October 13 indicated that of the promoters’ holding of 50.93% in the company, 44.24% is encumbered, partly against loans taken by group companies. Further, almost 80% of the Singh brothers’ holdings in Fortis Healthcare is also pledged, as per filings.
