Fortis-Manipal revised deal a lesson in having your cake and eating it too
It could have been a simple conclusion. Manipal Health Enterprises Pvt. Ltd has increased its offer to acquire Fortis Healthcare Ltd’s hospitals business. It will now give 13 shares of Manipal Health for every 100 shares of Fortis Healthcare, instead of the earlier 10.83 shares.
This improved share swap ratio values Fortis’s healthcare business at Rs6,061 crore or 21% higher than earlier, with Manipal Health continuing to be valued at Rs6,070crore. Fortis is still valued at a discount, which Manipal’s management had earlier attributed to its various promoter-related issues and regulatory concerns. Still, the new ratio is better and values the Fortis share at the level it was when the offer was made.
Before we call it sweet or not, let’s see what else Manipal Health has done. In the first offer, the firm was to buy 20% in SRL Ltd from Fortis for Rs720 crore and then offer to buy 30.9% stake from other investors for Rs1,113 crore. Also, Ranjan Pai and TPG Capital were to invest Rs3,900 crore through a preferential equity allotment into Manipal Health. This money was to be used to part-fund the Rs4,650 crore acquisition of its hospital assets from RHT Trust.
Both the 20% stake purchase for Rs720 crore and the Rs3,900 crore fund infusion have been deleted in the new offer.
Instead, Pai and entities under his control will directly buy a 30.9% stake in SRL for Rs1,113 crore, with Fortis Healthcare owning a 56.6% stake in SRL and minority owning the rest. Earlier, post-demerger of hospitals, Fortis would have been left with a minority stake in the diagnostics business and cash. Manipal Health or its promoters would have had nothing to do with Fortis.
That has changed. The Pai group gets management control of SRL, which is also untouched by the problems affecting Fortis. They propose to merge SRL into Fortis, after the hospitals business is demerged. This is likely to give the Pai group a significant stake over Fortis, potentially giving them control as well. While the documents don’t say so, they may move for a merger once Fortis’s legal and other problems are cleared. The Pai group will then effectively own a significant stake in a listed diagnostics company.
In Manipal Health, sure, the promoter group will own a relatively lower stake than earlier, as they are offering more shares to Fortis’s shareholders. But this company has to pay Rs4,650 crore to acquire its hospitals from RHT Trust, a Singapore-based business trust. Manipal Health will float a Rs4,000 crore rights issue, post-demerger, to fund this acquisition.
This cuts down the promoter group’s contribution significantly, assuming minority shareholders subscribe in full. That will, of course, depend on market valuations and the rights offer price. In some way, this also calls upon minority investors to put their money where their mouth is. Having claimed that their business should be valued more, considering its long-term prospects, they should not hesitate to subscribe to a rights issue, one could argue.
The Pai group has stitched together a clever second offer. Fortis shareholders get more for the hospitals business, and they can remain invested in a diagnostics business (through Fortis). The promoters too get to be invested in two listed businesses, and all this with a substantially lower investment outflow. Note that the shareholding structures can change, depending on valuation of the rights of Manipal Health and merger of SRL.
The structure is still complex and can still be tripped by litigation—only recently, Fortis was impleaded in a case filed by Daiichi Sankyo Co. Ltd against its erstwhile promoters Malvinder and Shivinder Singh.
After the second offer, Fortis’s shareholders are definitely better off. The company’s shares did not increase much but that’s because it has risen in recent weeks. With this offer unlikely to be revised further, a rival bid for Fortis from Malaysia’s IHH Healthcare Berhad is the only event that could tempt them into seeking a better deal.
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