The promoters of Fortis Healthcare (India) Ltd and Fortis Healthcare International Pte Ltd have decided they are a better force together. Shareholders may be puzzled by the apparent about-turn in the group’s strategy in such a short time.

On Monday, Fortis India announced that it will be buying out Singapore-based Fortis International in an all-cash transaction from the promoters.

The genesis for this change stemmed from the group’s ambitious, but failed attempt to acquire Singapore’s Parkway Holdings Ltd. Malaysia’s sovereign wealth fund Khazanah Nasional Berhad outbid Fortis to acquire Parkway.

At that time, Fortis’ promoters had contemplated an international listing for Fortis India in Singapore to reflect its global ambitions and to make fund-raising easier as well. That has not happened yet. Meanwhile, the group decided to restrict the listed entity to the domestic market.

What caused the change of heart? In an emailed response, a company spokesperson said the promoters took on the risk of creating the international business till it matured, and it became clear that a combination would be value-accretive. Now that the international business is similar to the Indian business in size and capability, they decided to combine.

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The earlier structure may have tackled another irritant. Fortis India’s minority shareholders have not shared the promoters’ enthusiasm for massive acquisitions, which was evident during the Parkway deal. Since Fortis International funded overseas acquisitions itself, these purchases did not affect the listed company’s valuation nor attracted much scrutiny.

Fortis International has done a few large acquisitions in Australia and Hong Kong, and relatively smaller ones in some other countries. Its acquisition spree appears to have met the intended target. No financials for its international operations have been disclosed, so evaluating the combined entity is not possible at present. Perhaps this will be known when the valuation is announced.

Fortis India will benefit if the valuation is closer to the book value of the international business, than if the consideration yields a handsome profit to the existing owners, that is the promoter group. Their benefits can accrue from an appreciation in the value of their stake in Fortis India as well.

Fortis India can benefit from the geographical diversification, addition to revenues, and sharing of expertise and processes across markets. A global network also raises the possibility of patient referrals across network hospitals, especially to India for surgical procedures. The outgo is likely to be sizeable, based on the size of the recent acquisitions announced by Fortis International. That may stretch Fortis India’s balance sheet a bit.

All eyes will now be on the price payable, whether it is fair to minority shareholders, and the financial health of the international business. The share price’s reaction was initially euphoric, but it ended the day down by 1.9%, possibly reflecting these concerns.

Graphic by Ahmed Raza Khan/Mint

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