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Why Fortis Healthcare Shares Plunged After Its Deal With Manipal Health

Shares of Fortis Healthcare fell as much as 13 percent, the most in a month, amid concerns about its valuation pegged in a merger of its hospital business with Manipal Health Enterprises Ltd.

The two-step deal to create India’s largest healthcare company overtaking Apollo Hospitals Ltd. involves merger of the hospital business of Fortis Healthcare with Manipal Health, according to an exchange filing. That will be followed by an infusion of Rs 3,900 crore from Manipal Health to increase stake in SRL Diagnostics and buy assets from Religare Health Trust.

The proposed transaction has three negatives for minority shareholders, Deepak Malik, an analyst at Edelweiss Securities, said in a note. There is no clarity on the usage of cash generated by selling stake in SRL; the valuation of Fortis’ hospital business is lower than its current market valuation; the merger will create a holding company for SRL which will attract a holding company discount—its valuation will be less than the sum of investments it holds.

The deal comes as Fortis Healthcare founders Malvinder Singh and Shivinder Singh battle allegations of siphoning funds from the hospital chain and non-bank lender Religare Enterprises Ltd., Bloomberg reported earlier. India’s fraud watchdog and stock market regulator are both investigating the company. The brothers stepped down from the boards of the two companies earlier this year.

India’s Largest Hospital Chain By Revenue

The combined entity, to be called Manipal Hospitals, will have higher revenue and beds than the south India-based Apollo Hospitals founded by Prathap Reddy, according to a Fortis Healthcare presentation.

Why Fortis Healthcare Shares Plunged After Its Deal With Manipal Health

Shareholding

Every shareholder of Fortis Healthcare will receive 10.83 shares in the post merger-listed Manipal Hospitals for every 100 shares held, according to the exchange filing. The combined entity will be 33 percent owned by Fortis shareholders.

Rajan Pai, who holds 58.8 percent in Manipal Health, will get a 37.9 percent, and TPG’s holding will fall from 21.7 percent in Manipal Group’s arm to 20.7 percent in the new company.

Why Fortis Healthcare Shares Plunged After Its Deal With Manipal Health

Valuations

Manipal Health is half the size of Fortis Healthcare. Yet, the deal assigns similar values to both companies. It values Fortis Health at an enterprise value of Rs 7,300 crore compared with Rs 7,200 crore for Manipal Health, according to Edelweiss Securities.

Why Fortis Healthcare Shares Plunged After Its Deal With Manipal Health

SRL Diagnostics will remain a subsidiary of Manipal Health and Fortis Healthcare will be a holding company with a 36.6 percent stake in SRL and the remaining 12.5 percent will be held by existing investors.

The deal is value dilutive for shareholders in the near term, Param Desai of Elara Capital said. In the long term, the company will be a strong entity with a pan-India presence and exposure to high growth diagnostics business, he said. “It’s important to see if the proposal gets minority shareholder approval.”

Highlights of the deal announced by Fortis Healthcare management:

  • Liabilities of Fortis Healthcare will remain with the company itself.
  • Listed Fortis Healthcare will own 36.6 percent in SRL after selling 20 percent to Manipal Health.
  • Rs 720 crore received from Manipal for SRL will be ploughed back into the business.
  • Fortis’ hospital business valued at Rs 97-98 per share.