Private equity heavyweights TPG and General Atlantic (GA) have joined forces in a bid to acquire a controlling stake in Fortis Healthcare from its promoters Malvinder and Shivinder Singh said four people privy to the developments.
The deal, if and when concluded, will also involve the purchase of the diagnostics arm SRL, these people said.
IHH Healthcare, Asia’s largest healthcare group, is the other serious contender in the fray. Fortis is India’s second-largest hospital chain by market value.
Late last year, TPG held exclusive negotiations to buy a sizeable stake in Fortis, but those talks did not fructify. This led the Singh brothers to throw open the divestment process to multiple potential suitors, including KKR and Bain Capital.
ET was the first to report on December 13 about TPG’s talks with the Fortis promoters for a possible takeover.
A spokesperson for RHC Holding Pvt Ltd, one of the promoter holding companies of Fortis, said, “We cannot comment on market speculation.” TPG and KKR declined to comment. Mails sent to GA’s India head Sandeep Naik did not elicit a response till the time of going to press.
“IHH is always looking at various value accretive opportunities. However, it is not appropriate for us to comment on specific transactions and we will update the market if there are any material developments,” the healthcare group’s spokesperson told ET.
The promoters currently hold 52.3% in Fortis, according to stock exchange notifications. Of this, 85.6% is pledged. The company’s market cap stands at Rs 11,446 crore.
The promoters will dilute a minimum 26% and cede management control. The acquisition is likely to trigger an open offer for an additional 25% equity. If a deal gets consummated prior to the reorganisation, then the rejig may not go through, said officials in the know on condition of anonymity as the talks are still in private domain.
“The PE consortium and IHH are the strongest to close the deal. KKR is a notch below them, followed by Bain. All sides are looking to make a formal announcement by the month-end,” said an official involved directly. “The new investors will be the largest shareholder in the target entities,” he added.
With a control premium, the deal could value Fortis at around Rs 12,000 crore. Additionally, SRL could be valued at Rs 4,500-5,000 crore, said the officials.
These value-unlocking exercises, in the works for close to a year now, will help the cash-strapped brothers deleverage group debt, which stood at Rs 4,700 crore as on March 31, 2016, up from Rs 3,831crore in June 2015. RHC Holding, the promoter entity, alone has Rs 2,800 crore of debt.
Fortis’ market cap has appreciated 45% since December in anticipation of a deal. On Wednesday, the stock hit its all-time high of Rs 229.9.
SRL, which claims to be India’s largest diagnostics chain, is being spun off from Fortis into its existing listed subsidiary Fortis Malar and renamed SRL Diagnostics as part of a major reorganisation.
The Singh brothers, the majority shareholders in Fortis, will control 40.6% in the diagnostics arm when it’s listed, according to an exchange filing last August.
Subsequently, the group’s hospital business would be housed under the listed company Fortis Healthcare. The entire process is expected to be completed by the middle of 2017.
“It will be a combination of primary and secondary share sale. The final structure of the transaction is still being worked out. The promoters have been keen on demerging SRL. The negotiations should conclude by this month end.
At a valuation of $2.6-2.8 billion, this is poised to be the largest deal in healthcare,” said an official in the know.
“It’s a large cheque, so the two PE funds are looking to team up and co-invest. They have been working for the longest time on this transaction.”
Officials say a PE consortium may want the incumbent management team and the promoters to stay on as junior partners. A strategic investor like IHH may, however, insist on a buyout. IHH operates the Parkway Pantai chain of hospitals.
DELISTING IN SINGAPORE
Fortis had planned an asset-light model by placing its businesses under a trust, which raised Rs 2,260 crore on listing in Singapore in October 2012. Fortis is the sponsor of the Religare Health Trust (RHT) with a 29.6% equity stake. However, the transfer of assets to RHT has been putting pressure on the margins due to hefty services fee.
Last October, Fortis Healthcare completed its acquisition of 51% economic interest in Fortis Hospotel, a subsidiary of RHT. Based on the current market valuation of Rs 3,466 crore, delisting RHT would require Rs 2,426 crore. Sources said proceeds from the sale are likely to be used for that purpose as well.
Fortis operates 45 hospitals (including projects under development) in India, the United Arab Emirates, Mauritius and Sri Lanka. SRL has over 400 labs and more than 6,000 collection centres in India and abroad.
A clutch of investors such as International Finance Corp, NYLIM Jacob Ballas and Avigo Capital Partners, which have been trying to monetise their 34% stake in SRL for years, will also get to cash out.
However, analysts believe the ongoing litigation with Daiichi Sankyo as well as other legal cases and title issues around various hospital lands could turn last-minute deal breakers. With the stock on a tear, valuations could be another potential challenge.
But an RHC spokesperson said the court order in the Daiichi case is only applicable in respect of unencumbered assets of the parties to the litigation, namely RHC Holding Pvt Ltd and Oscar Investments Ltd. “The operating listed entities and other subsidiaries of the group, including Fortis and SRL, are not party to the litigation and there is no order on any of the operating companies and other subsidiaries of the group, which continue to run their businesses in normal course.”
STRATEGIC INTENT
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 Hospitals chain. Its growth fund backed mother and child care hospitals Motherhood in July. Interestingly, Fortis’ former CEO Vishal Bali is a senior adviser in the fund and the head of Asian healthcare practice of TPG Growth.
GA had previously shown interest in acquiring a 10-15% stake in Dubai-based Aster DM Healthcare, a hospital chain owned by NRI doctor-businessman Azad Moopen, but the deal did not materialise.
Parkway Pantai, which operates in Singapore, Malaysia, China, Brunei and the UAE, has a strong presence in India. It entered the country in 2015 buying 51% in Hyderabad-based Continental Hospitals for Rs 300 crore and 74% in Global Hospitals, also based in Hyderabad, for Rs 1,280 crore.
Its parent, IHH, controlled by Malaysia’s sovereign wealth fund Khazanah, has been partially exiting its largest bet in India — Apollo Hospitals. In March, IHH, the second-largest shareholder in Apollo, sold more than half of its stake after a 10-year association with the Prathap Reddy family.
Sensing an opportunity, the Singh brothers have suggested combining IHH’s India investments and merging them with Fortis, said officials.
Source: Economic Times