Medical staff accompany a patient on a trolley through a corridor inside the Royal London Hospital, part of the Barts Health NHS Trust, in London, U.K. (Photographer: Chris J. Ratcliffe/Bloomberg)  

How Fortis Went From Portfolio Investment To Takeover Target For Burmans

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India’s second largest hospital chain Fortis Healthcare Ltd. was just another portfolio investment for India’s Burman family. Till the Supreme Court allowed the company’s lenders to sell their pledged shares amid a legal battle with Japan’s Daiichi Sankyo.

“When the pledged shares of the erstwhile promoters went to the market – and at the time there were no promoters – that’s when we felt that there was a possibility of a combined offer,” said Mohit Burman, a member of the Burman family whose joint bid with the Munjal family was backed by the Fortis board. Prior to that, Fortis was a “substantial” portfolio investment for the Burmans as they raised their stake gradually as the story was unfolding, Burman told BloombergQuint in an interview.

Sunil Munjal’s Hero Enterprise Investment Office and the Burman Family Office, that jointly own a minority stake in Fortis, have committed to invest Rs 1,800 crore. Of this, Rs 800 crore will be infused through a preferential allotment at Rs 167 per share. The rest would be through a warrants issue at Rs 176 per share. with Rs 250 crore funded upfront. That’s a total infusion of Rs 1,050 as soon as shareholders approve the offer and the average purchase price amounts to Rs 172 per share.

The takeover battle for Fortis Healthcare started earlier this year when founders Malvinder Singh and Shivinder Singh lost shareholding control due to mounting debt and after lenders invoked pledged shares. They then stepped down from the board amid allegations of siphoning funds. The fragmented shareholding of the company attracted five bidders in just over a month: TPG-backed Manipal Health Enterprises Pvt Ltd., Malaysia’s IHH Healthcare, KKR-backed Radiant Life Healthcare, Fosun International and the Munjal-Burman combine, whose revised bid was finally accepted by the Fortis board.

Also Read: Fortis Board Backs Munjals And Burmans In Takeover Battle

Together the Munjal and the Burman families own about 3.5 percent stake in Fortis. If the shareholders approve the offer, their stake would go up to about 20 percent.

But the bid wasn’t a shot in the dark. “We've been investors in this company for the last one year and healthcare has been somewhat of a sweet spot for us,” Burman said.

Historically our flagship has been consumer goods, but we’ve had a pharmaceutical business and we have lot of healthcare ventures. So it was something we were interested in.
Mohit Burman

Even for its partner in this bid, the wheels had been set in motion last year. Sunil Munjal had considered a larger investment in Fortis but decided not to go ahead due to the Daiichi hangover, Burman said.

Burman remains confident that their bid will be accepted by the shareholders as it addresses the immediate issues that Fortis is facing. “It is transparent, it is clean and requires no due diligence or new agreements. It also doesn't disrupt the structure of the business. It's the most easy to execute,” he said.

He added that they remain open to pumping more money into Fortis but only at a later stage following discussions with Fortis shareholders.

Watch the full interview here.

Here’s the edited transcript of the interaction:

What sparked your interest in Fortis health care because so far you have had a passive investment in the business?

The battle is not yet over. We have been an investor in this company for the last one year and healthcare is somewhat of a sweet spot for us. Historically,our flagship is fast moving consumer goods. But we have had a pharmaceuticals business before and we have lot of healthcare ventures. So, it was something we were interested in. Mr. Munjal had done due diligence on this company last year. But due to the Daiichi hangover, he decided not to go for it. So, when the pledged shares of the erstwhile promoters went to the market and there was no promoter left, then that was the time when we actually felt that there was potential possibility of a combined offer.

So, when it originally started this was a portfolio investment and nothing more than that.

It was a portfolio investment but a substantial investment for us because we were taking up our stake as the whole story was unfolding. Today,combined, we hold 3.5 percent of the company.

Is it just you and the Munjal family or this is just you with 3.5 percent?

The 3.5 percent is combined. So, approximately 2.5 percent owned by me (Burmans) and 1 percent by the Munjal family.

So, he bought that 1 percent after you’ll decided to bid together or that 1 percent was of his own interest?

These were investments which were done before the two of us decided to do a combined offer.

So, how did you come together and decide on a Rs 2,000 crore deal? (Current investment offer Rs 1,800 crore)

The families have known each other for long time. And Mr. Munjal has been interested in healthcare and had been looking at this business. When we decided that we will bid for it, it was in a conversation that Dr. Burman, my cousin, had with Mr. Munjal who know each other very well. The end game is going to be more than Rs 2,000 crore, but we are focused on this now.

What according to you, makes your offer better than the others? From a price point of view you are not the highest. The Fortis board said your offer was picked on grounds of liquidity, certainty and risk parameters.

Those were good grounds. If you look at the offers, ours is the only binding offer which is ready to infuse money in to the business straight away after shareholder approval. It is transparent, clean and requires no due diligence, no agreements and doesn’t disrupt the structure of the business. So, it is the most easy to execute and those were that few reasons which went our way.

How did you determine that Rs 1,800 crores was the right amount of liquidity that Fortis needed at this point?

We haven’t done due diligence. So, we don’t know the exact number. Our investment bankers and us put those numbers together (based on what) we felt the business would need to be put in back in shape for over the next 18 months or two years.

You are open to the idea of investing more money in Fortis?

Yes.

You don’t intend to change the current management or board structure?

No. Because at this point of time, we don’t have enough insight in the business to be making decisions like that.

Manipal and IHH wanted to take over the business. As a pure investor you might be the single largest shareholder, but you will not have an clear majority. So, what is this offer about?

As soon as we get entry into company we will be looking at it on a much larger scale. We are willing and committed to put more money to work and if need be, take our stakeholding up.

But with an investment of Rs 1,800 crore you will have just short of 20 percent. You don’t even have enough shares to block a vote that comes to shareholders. Why not go whole hog and say that we want to acquire the full company?

As soon as we get insight into the business, then that could be the case.

Then you will increase your shareholding beyond that.

Exactly.

How long will it take to make that decision?

That is difficult question to answer. At the moment, we have only asked for three board seats. We have presented a short and a long-term view to the executive committee and the board. Last 3 days, we were doing presentations. So, we have a short term and long-term plan.

What is in the short- and long-term plan?

The short-term plan is to use this money to make sure that the business is back in shape in next 2-3 months.

What specifically will you be fixing?

There are creditors knocking at the door, doctors are leaving, the hospital needs money for upgrading. So, the money we are promising in the beginning will used for that. Then for the mid-term plan we have to look at SRL, RHT. All these things are addressed in our offer.

In your offer, you said that you will consider selling SRL.

We gave two options to the board and the executive committee. We are still looking at it from the outside-in. So, unless we don’t get clarifications on specific areas of the business, it is difficult for us to make informed decisions.

Specifically, for SRL we looked at two options. One is the sale of SRL because there was already a demerger process which was happening. We go along by whatever was already done. If we were to demerge that business and sell it that money could go to buy the RHT assets. In case, we believe that SRL has a very good future and if we can add value to this business, we have also given a plan where we will put in money (into Fortis) with a rights issue to fund the buyout of RHT assets.

We are getting lot of feedback from shareholders and they are saying that they want to participate in the revival and the growth of the company. We also said that there will be possibility of rights issue where shareholders can participate.

Why you didn’t do this as a buyout like Manipal had proposed?

Manipal had planned something totally different. They weren’t buying into the business, but they wanted to buy the hospitals. To do the demerger of that it could take 6-12 months. So, what happens to the business till then? Our basic focus was to make sure that the business gets enough funds to survive as well as give us insight to be able to gauge our commitment and to see if we want to take it to the next level.

You’ll have never run hospitals.

Mr Munjal runs a very prestigious hospital. Not only a 1,500 bed hospital but it was also voted the second-best teaching hospital. We have also been in the healthcare space for very long time.

You did not think that it might be better, as shareholders of Fortis, to see an experienced hospital chain take over the company. The revised bids may have dropped the demerger bit.

By then we have already put our feet in it. At that time, when we saw that the assets of the business were being demerged and the shareholders weren’t getting their due, then we felt that it was an opportunity for us. By then we were committed, and we were going to go along.

Yet, they are experienced companies. You’ll have never run a hospital chain.

IHH runs hospitals in Malaysia and they don’t have any Indian experience. We have been operating businesses in India over 100 years. It may not be hospitals but other businesses. IHH is operating hospitals in Malaysia. How can you say that they have better expertise?

These are not hospitals which are headless. They’ve  been running for last so many years. Systems and people are in place, so where is the need to have a chain of hospitals from China or Malaysia to run them.

For minority shareholders, there are two hospital chains - one experienced in Asia and one in India. Then there is this combine which doesn’t have experience in running a hospital chain but lots of other business experience. So, they have to pick and choose from all of these.

As our offer has been recommended by the board, it will be our job to convince the shareholders.

In you long-term plan, what have you put in to give shareholders confidence that this asset will be in the right hands?

In our long-term plan, we will address shareholders. Buying out of RHT which will save a lot of money and going to pay for the rentals has been addressed. SRL’s both options have been addressed.

Everything is being addressed to the board and the committee and we will start presenting to shareholders in due course.

What will be your strategic plan for this business?

We have to address the issues that are in front of us today. And long term strategic plan will only come once we have insight into the business.

You envisage putting further money in the business. That may take you above 25-26 percent? Then you may have to do an open offer for all shareholders?

If we decide to come to that situation then yes. If we exceed 25 percent, then we will have to go by the law.

Do you expect to exceed 25 percent? Have you factored that into your plan?

We have factored into the plan in terms of money commitment, but we will abide by the law.

You said that you might consider a rights issue. In a rights issue, all shareholding increases proportionately unless you choose to subscribe to unsubscribed shares of other shareholders. So, your plan one is to go from 3 percent to 19-odd percent. Your plan two is to go from 19 percent to 25 plus percent?

We haven’t committed on that plan because we have to see the reaction of the shareholders. Some may have to stay, and some may not. Only when we discuss with the shareholders will the plan two come into force.

Would you be interested in taking your stake above 25 percent if the shareholders are willing to sell to you?

This will have to be a discussion between the two partners. We have considered it, but only when we start discussing with the shareholders will we decide what next path is going to be.

You don’t want to change the management at this point?

No, because we haven’t had the opportunity to interact with them, except the top 1-2 which were in the meeting.

This company has not only seen Singh brothers’ ownership decline to nothing, but it has also seen several suspicious financial transactions take place. Have you looked at any of them in detail? Have you considered of what the size of that black hole might be?

There are other companies who are doing due diligence on this for a long time. Most of the ‘black hole’ is in the public domain. So, we are assuming that what is there in the public domain is what it is. Once we go in to the business there might be more, but it is difficult for me to comment because we don’t get to look at the books.

What is the worst-case scenario you put together on these suspicious transactions?

The worst-case scenario is already out there.

How much? Rs 500 crores, Rs 1,000 crores, Rs 1,500 crores?

I can’t put a number to that. It is difficult to say. There are 1-2 transactions which are being reversed. Some money is coming back, it is difficult to say. I would say it could be around the numbers you just said, probably between the first two.

You are going to put in place an acquisition vehicle?

All this is going to be talked about now as our offer was recommended yesterday. The funds are already parked, and they are ready to go within next 30 days. We may just invest via two different vehicles.

How will the resultant 19 percent share be split up between the two families?

We are acting in concert. So, even if we do it as two companies, what the exact shareholding will be has to be discussed.

Currently you are 2.5:1. Is that the proportion here on?

No.

How are you raising the Rs 1,800 crore?

We are not raising it. It is cash sitting with us between both parties.

You have not looked for external financing?

Not for this initial commitment.

So, it is all cash?

Yes, and that is one of the factors why the board recommended us for it.

A group of shareholders have sought the removal of four directors on the board of Fortis Healthcare. Atleast three of those four voted in favour of your offer. As their moral standing, legitimacy is under question someone may oppose the board decision as it will impact Fortis healthcare for years to come.

I don’t want to pass judgement on people’s moral standing. As far as we are concerned, we had to present the case to board and a committee and there were 3 independents added to that board. As far as we and the other bidders are concerned, we were told to present the case to them. So, we have to present the case to somebody. We did our best in what we had to do. If these board members need to be changed or the shareholders think that new people will come, then we will present our case again. It is difficult for me to make a judgement on what will happen next month.

Do you anticipate that this could become a problem for you?

As far as we are concerned, we have presented our case and we were recommended. Our focus is to reach out to shareholders. Of what could or might not happen is not something we will keep in account at the moment.

There could be doubts raised that the board has picked a bidder who has not sought to takeover the company, not sought to change the current board and does not seek to change the management either. The board has picked a bidder who wants to maintain status quo. People will raise this question as these same board members have run the company during the time when all the suspicious transactions took place.

They’ve already raised questions. That’s why there were three independent shareholders who looked at our bid. It has been addressed. That’s why it went to an independent committee. That’s why the concerns have already been met.

So, all these concerns have been met by the various external advisers that have come in?

We are doing this with our eyes closed. We haven’t done due diligence. I haven’t committed that we won’t change or we won’t do this. But how can I say I will change the management before knowing who they are. This is not possible. We haven’t said that it won’t happen. Unless we don’t get our feet in and see what the business means, how can I say that I will change. Maybe it happens and maybe it won’t.

Your views on the current board of directors? As a shareholder, since last year you have watched the value of your shares decline because of all these suspicious transactions and the way the company is being run.

I am not sitting here in judgement of board members. We saw an opportunity, we felt that we were willing to add value and take this business to the next level. There is a board that existed which we presented our case to. There were shareholders who wanted more people to come (to the board). They added three independent directors. These people decided that all the bidders should go to independent committee and all of them did.

The committee also faced controversy - Renuka Ramnath stepped down.

Your questions will be the same if someone else was bidding. You could say that what was the sanctity of those bids?

As a shareholder, you have witnessed a decline of the company in the last one year. The same board was in charge. So, how do you feel about the board?

This is the only board which I have to present my case to.

But what do you feel about the legitimacy of the board?

That is the board which was there and that is the board which is now. In future, if we are in a position and we need to add independents and if some of them need to be changed, so that will be the decision made at that point of time.

Will you be voting in favor of directors or against?

I have not thought about it yet.

Do you agree with the shareholders who have sought the removal of four directors?

This is a public limited company. You have four directors who have been there for some time. You have three new directors. If shareholders remove these four directors, the accounts need to be signed. It is the year ending. Are you telling me that these three new directors will sign the accounts? If the accounts are not signed, then the company will be delisted. It is very difficult to say what is right or wrong. I have to look at the future of the company. And the future of the company doesn’t require to be a headless chicken. Now shareholders can come in and question the legitimacy of this board and also the removal. If they were removed, these three new people that have come in, will they be able to sign these accounts? I won’t be able to ( if I were in their place). So, what happens to the company and business?

So, you will vote in their favor?

Now that we have been recommended to shareholders I have to look at future of this company. I can’t look at the past. What has happened has happened. I can’t change it. We have to make sure that the business survives and goes to next level.

You’ve asked for three board seats. Three of how many? Are you looking at an expanded board?

Three additional. We had asked for it before the other three independents came in. Originally, we had planned for 3 of 8 but now it is 3 of 11. My intention is that the money that goes in is overlooked by independent board members, so that the money goes in right places where it is supposed to. So, whether it is 3 out of 8 or 3 out of 11 it doesn’t matter.

Will you then become the promoter of this company? (If you have 3 of 8 seats)

I am not sure. If we get tagged as a promoter, then there will be an open offer.

So, if you have half the board then that is control.

We don’t have half.

If you are able to put 3 members on the board and the board size stays 8, that’s close to half.

Our initial proposal was 2 board members and we have now asked for 3 because we have upped the offer. We don’t have half the board, it is one short.

If the other 2-3 bidders are serious then they may approach shareholders with voluntary open offers. Are you prepared for that? A bidding war?

If you look at history, TPG-Manipal, IHH have had access to this company and have done due diligence. If they have looked at the business for a long time and have made offers for the prices that they have, which is happening over last 2 months, with substantial revisions, then this is the amount of money which Fortis is worth. If it becomes an ego decision and people start making open offers for prices way above, then we will have to look at it again. But we will not be driven by that.

For the first Rs 1,000 crores you are offering, the price is at Rs 160 a share.

The combined price is Rs 172.

It is short of IHH at Rs 175 and higher than Manipal’s price of Rs 160 per share.

But IHH is a non-binding offer.

Would you be inclined to participate in a bidding war?

It will be driven by rationale and not by ego.

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