(Bloomberg) -- Fortis Healthcare Ltd.’s board of directors chose IHH Healthcare Bhd. to take control of India’s second-largest hospital chain, ending a months-long takeover battle as the company wrestles with investigations over financial irregularities.
Malaysia-based IHH’s offer would see 40 billion rupees ($583 million) invested directly in the company through a preferential allotment of shares at 170 rupees a share, according to a statement Friday from Fortis. After an open offer to shareholders, IHH, one of Asia’s largest health-care services company, will own as much as 57 percent of Fortis. The Indian company rejected a competing proposal backed by private-equity firm TPG.
The price is 15 percent above Fortis’s closing value of 147.8 on Friday.
“This is pretty much the best that you’ll get in the circumstances,” said Nitin Agarwal, an IDFC Securities Ltd. analyst in Mumbai. “It’s a pretty generous offer all things considered, given the challenges that you had.”
A bidding war for cash-strapped Fortis kicked off earlier this year after its founders, brothers Malvinder and Shivinder Singh, lost their shareholding due to debt, and allegations that they had improperly taken funds from the company. A four-months-long takeover fight drew as many as five potential suitors from as far away as the U.S. and China, all keen to win a prime position in one of the world’s most under-served health-care markets.
Under terms of the deal, following the 40 billion rupee investment, IHH will then make an open offer to buy up to 26 percent of the shares held by existing shareholders, bringing its total stake in Fortis to between 31 percent and 57 percent, depending on how many shareholders participate in the open offer, the statement said.
Fortis will need about 58 billion rupees in funding over the next year, including money for buying out SRL’s minority stakeholders, IHH Healthcare Chief Executive Officer Tan See Leng said in an interview. Fortis may also look at a rights issue "after a point of time," he said.
The sales process, which often played out in the press with offers and counter bids disclosed publicly, had to be restarted several times amid questions about the board’s independence, which eventually saw all its directors replaced. Even now that it’s won, IHH Healthcare will have its work cut out.
Not only must Fortis’s new owner turn around three straight quarters of losses, it must also deal with the fallout from the conclusions of investigations by government agencies. A report by an outside law firm commissioned by Fortis’s board found about 4.5 billion rupees were loaned amid “systemic lapses,” and were used by the borrowers to ultimately repay money owed to entities with ties to the Singh brothers. Fortis had to write off the amounts in the latest quarter even as it initiated legal action to recover the missing money.
IHH Healthcare must also deal with ongoing investigations by both India’s market regulator and its fraud watchdog, which launched its probe in February after Bloomberg News first reported the missing funds, citing people with knowledge of the matter. Fortis has said it is cooperating with the authorities and has turned over the results of its investigation.
Malvinder Singh, who has since stepped down, has denied there had been mismanagement or misuse of funds.
“There is no doubt that the last 12 months have been challenging for us,” Fortis Chief Executive Officer Bhavdeep Singh said in the statement. “However, I am confident we can collectively reenergize the entire organization.”
Of the four bidders who were either originally invited to participate or expressed an initial interest to do due diligence, only IHH and TPG-backed Manipal Health Enterprises Pvt. ended up submitting binding bids. A consortium of two Indian business families and a KKR & Co.-backed firm both dropped out.
Having recommended the IHH bid, Fortis’s board will now refer it to shareholders for a vote, according to the statement.
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