Event update: Fortis Healthcare (Under Review) - Announces deal with Manipal hospitals

Event

• Fortis Healthcare (FHL) has announced a deal for the demerger of its hospital business into Manipal hospitals

Key highlights

• As a part of this proposed multi-staged deal, FHL will demerge its hospital business and then merge it with Manipal hospitals. This entity will be listed on the exchanges.
• Further, FHL will sell 20% stake in SRL to Manipal hospitals for Rs7.2bn valuing the SRL business at Rs36bn. Post this it will continue to hold 36.6% of SRL while the combined entity (Manipal hospitals) will hold 50.9% (in process to acquire the 30.9% from other investors) of SRL  and balance 12.5% will be held by the minority shareholders   
• For the transaction purposes, FHL Hospital business is valued at ~Rs50bn (Rs~95-98/share) - ~30x FY18E EBITDA. We believe these valuations are below our / street estimates.
• The shareholders of Fortis Healthcare Limited (FHL) will get 10.83 shares of Manipal hospitals for every 100 shares. FHL shareholders will own 1/3^rd of the final listed entity with Manipal hospital promoters and TPG Capital owning the majority stakes of 37.9% / 20.9% respectively.
• Mgt currently estimates that the resulting Manipal hospital entity will have adj net debt of ~Rs35.6bn with performa 9MFY18 adjusted EBITDA of Rs7.45bn (assuming completion of RHT buyout)
• The entire transaction post all the regulatory approvals is expected to be completed by Q4FY19.

Valuations & view

This proposed merger of FHL and Manipal hospital networks is strategically positive as it creates one of the largest healthcare entities in India with multiple well established hospitals across North as well as South India. The combined entity can realize significant operational synergies and leverage its balance sheet strength to further strengthen the network across India. However, from a FHL minority shareholder perspective, the prima facie deal valuations are disappointing and there is limited operational / financial information available on the Manipal group. The combined entity will also continue to hold significant debt on its books. Also, we believe that there will be some uncertainties regards timelines for closure given the complicated nature of the transaction. We will continue to monitor the developments and keep our FHL rating under review till clarity emerges on various key aspects.