Event update: Fortis Healthcare (Under Review) - Board recommends Munjal-Burman offer for shareholders' approval

Event

• Fortis Healthcare (FHL) has recommended the binding offer of Hero Enterprise Investment office (Hero / Munjal) and the Burman Family Office (Burman) for shareholders’ approval.

Key highlights

• The BOD has decided in favour of Burman-Munjal offer amongst all the binding offers taking into account the recommendation from the Independent Expert Advisory Committee, financial and legal advisors.
• As per the terms of the binding offer, there will be total infusion of Rs18bn (Rs8bn through preferential issue at Rs167/share and balance Rs10bn through warrants issue at Rs176/share) directly in FHL. The bid envisages Rs10.5bn upfront cash infusion (Rs8bn of preferential issue and balance Rs2.5bn through share warrants). The suitors have indicated intent to invest the Rs7.5bn of balance warrants proceeds within 4 months. The offer entails three board seats for Burman-Munjal.
• Burman-Munjal consortium will own ~19-20% (including current holding of 3%) stake upon full conversion of warrants. We also believe that this transaction is unlikely to trigger any open offer.
• The upfront cash infusion will be made immediately, without any due diligence, after the acceptance of the offer and getting all the requisite approvals. The proceeds will be utilised for repayment of employee dues, matured loans and payment to pressing creditors and lenders.
• Further Burman-Munjal seek to only run the hospital business and will look to exit from SRL diagnostic business. The proceeds will be used to fund RHT buyout. In case divestment doesn’t happen, then the RHT buyout will be funded by a larger rights issue
• This bid is positive for Fortis shareholders in the sense that it leads to limited dilution with status quo largely prevailing on business side. Also, will lead to a rather quick fund infusion as no upfront due diligence is required. Acceptance of bid by the shareholders will enable the company to start over afresh in a relatively quick time and with a fairly credible set of new promoters at the helm.
• However, we think that given the Fortis financial challenges and business deterioration in recent quarters, it may require further fund infusion for accelerating growth. The way forward on the same in unclear right now. Also, the probes in FHLs financials are still going underway.
• Next monitor able going forward will be the outcome of shareholder vote and articulation of the growth strategy by the new promoters going forward, if they get the shareholders nod.

Valuations & view

We continue to keep our FHL rating under review till there is clarity on the way forward.