Event update: Fortis Healthcare (Under Review) - Receives revised offer from Manipal group

Event

• Fortis Healthcare (FHL) has announced receipt of an unsolicited revised binding offer from the Manipal Group

Key highlights

• FHL has received a revised binding offer from Manipal Group; FHL board has 7 days to accept the offer in its entirety
• This offer seeks to address the 2-3 top concerns raised by FHL shareholders in the previous scheme while valuing FHL hospital business at Rs118/share vs 98/share in the earlier scheme.
• In the new offer, FHL continues to own 57% of SRL. Post the demerger, the boards of FHL and SRL will consider a merger of the two entities. Proposed merger of FHL and SRL will create a standalone listed diagnostic company. It will eliminate any potential holding company discount on SRL stake which was a likely outcome of the first offer.
• For the hospital transaction, both FHL and Manipal hospitals are now valued similarly at ~Rs60bn. However, in the new offer, Manipal Group and TPG will not infuse any funds on a preferential basis. In lieu of the pref offer, there will be a Rs40bn rights issue where FHL shareholders can participate on an equal footing with Manipal hospital shareholders.
• Effectively, if the FHL shareholders fully participate in the rights issue (largely to fund the RHT buyout), they can continue to be equal shareholders in the demerged hospital entity.
• In our view, while the revised offer is monetarily superior to the original offer, it does add some complexity to the overall process. It remains to be seen whether the revised terms will be acceptable to the FHL minority shareholders.

Valuations & view

Overall, we think that the new offer is monetarily better and also seeks to address the two major concerns raised by FHL shareholders. The transaction values effectively values FHL at Rs158/share minus the impact of potential liabilities residing in FHL and should take around 9-12m to complete. This should cap near term upsides on the stock. FHL investors need to take a medium to long term view of the prospects of the combined (FHL+Manipal) entity for meaningful upsides from current levels. We are positive on the medium – long strategic outlook of this combination as it creates a truly pan-India healthcare play with some very strong healthcare assets. Given the uncertainty on securing shareholder approvals and the way forward, we continue to keep our FHL rating under review.