For once, the ball is squarely in the minority shareholders’ court.
On Friday, Fortis Healthcare Ltd’s board approved IHH Healthcare Bhd’s bid over that of the Manipal Healthcare-TPG combine. IHH will invest ₹ 40,00 crore in an preferential equity issue for a 31% stake in Fortis, and also launch an open offer at ₹ 170 per share for a 26% stake. This is lower than what media reports had talked about, of ₹ 180 per share.
No wonder then, that the Fortis share’s initial reaction was muted. Fortis shares opened at ₹ 145.10 per share on BSE, up 2.07% from to its previous closing. In intraday trade, the stock rose as much as 4.04% to ₹ 147.90.
With promoters owning only a 0.77% stake in Fortis, minority shareholders will decide the fate of any bidder. What questions should they ponder over before making a decision? One nuance they could consider is that there is no winner till they say so.
Also read: Disclosures at Fortis paint a scary picture, investors seek deliverance
The board of Fortis can only give a recommendation. It is for the owners to accept or reject it. It may have been better if the board presented both bids, their pros and cons, its recommendation and then asked shareholders to vote for one.
Instead, a preferential allotment may not give them much of a choice. Shareholders can only accept or reject the offer. Saying no to the preferential allotment—which will bring in funds that are sorely needed—may seem dangerously risky.
After all, it’s the only bid on offer. But what if it is not?
Consider this: 99.23% of its shareholders are institutional and retail shareholders, whose needs are strictly financial. If IHH’s bid is recommended, what stops TPG-Manipal Healthcare from making a hostile counter-bid?
So far, they have projected a friendly face but now that their bid has been rejected, those velvet gloves can be taken off. Both bidders can battle in the open, with the offer price and the deal structure being the main determining factors.
Irrespective of whether there are one or two bids in play, what should shareholders look for?
In the short term, the open offer price and the stake bid for are important. A higher stake implies a lower rejection rate. The price of the preferential allotment also matters, as the premium to the market price can act as a signal of confidence. While the offer is at a premium of 18.9% to the market price, since the acceptance rate will be low, investors have been left unimpressed.
Shareholders should watch for direct payments to promoters. These could be for brands such as Fortis or SRL that belong to them. Or there could be a long-term brand licensing agreement. There could be a non-compete fee. These are not illegal but they erode what the minority gets. The amount payable and whether it’s justified is what shareholders need to assess.
In the medium to longer term, the deal structure and the bidder’s plans for the company matter.
RHT Health Trust—the Singapore-based business trust that owns the hospital assets of Fortis—is an important part of any deal. Fortis’s shareholders had agreed to pay ₹ 4,650 crore to get its assets back and stop paying a fee to RHT. Plans of the successful bidder for subsidiaries such as SRL Diagnostics Ltd and Fortis Malar Hospitals Ltd also needs to be assessed.
Both IHH and Manipal-TPG have existing hospital businesses in India. Initially, Manipal-TPG’s offer was to combine the two businesses. In IHH’s case, investors would like to know its plans, so that minority shareholders don’t worry about a conflict of interest.
In the short term, valuations will depend on the open offer price, equity dilution due to the preferential allotment and any future equity infusion. Post-acquisition, an aggressive clean-up of Fortis’s balance sheet may have a one-time impact on reported financials. Once the slate is cleaned, factors such as the quality of the new owners and managers, their business plans and the likely earnings growth trajectory will determine how valuations move.
Shareholders of Fortis have had a trying time so far. They have their work cut out in the coming weeks to analyse the recommended bid. If they have a hostile bid on their table, it will make this difficult task a bit easier to bear.