(Source: Bloomberg)

Fortis Should Go to Bed With the Manipal Bid

(Bloomberg Gadfly) -- Fortis Healthcare Ltd. needs a quiet bed to lie down on and forget its checkered past.

Things haven't been going well for India's second-largest hospital chain. In January, a Delhi court asked founders Malvinder Singh and his brother, Shivinder, to pay a $550 million arbitration award to Daiichi Sankyo Co. The Japanese company had sued in Singapore over a drugmaker it bought from them in 2008 -- without the siblings being fully transparent about a U.S. probe that would soon cripple its export business.

Then, Bloomberg News reported in February that the embattled founders had taken at least 5 billion rupees ($76 million) of Fortis Healthcare's cash without board approval about a year earlier. The Singhs have since resigned, and with lenders invoking pledges on the shares mortgaged to them, they have also lost control.

Still, the brothers' shadow lingers. The market regulator, and India’s Serious Fraud Investigation Office, are looking into the company; the auditors have refused to certify financial results.

Given the uncertainty over what new Fortis liabilities (or deficient assets) may be uncovered, the interest among potential buyers of the business is remarkably strong.

Malaysia's IHH Healthcare Bhd. is valuing Fortis at $1.3 billion, or 160 rupees a share, which puts it slightly ahead of TPG-backed Manipal Health Enterprises Pvt.'s revised offer of 155 rupees a share. Separately, two prominent Indian business families have come together to offer 156 rupees a share. IHH has threatened to go hostile if its bid is rebuffed.

While that puts some heat on the board's decision to talk exclusively with Manipal, the directors may be on the right track.

For one thing, Manipal's is a binding bid. And folding Fortis Healthcare's 6,500 beds (which are mostly in northern India) into Manipal's southern India-based 6,400-bed operation, would create a national business, comfortably ahead of Apollo Hospitals Enterprise Ltd.'s 9,400 beds.

Finally, although Fortis has managed to raise short-term debt, a long campaign by shareholders of the cash-strapped company to play off rival bidders would greatly increase the odds of bankruptcy. 

While Manipal may also take time to close the transaction, at least it has completed due diligence. Fresh funds from a proposed rights offer would allow Fortis to complete a previously announced $711 million acquisition of RHT Health Trust, which would lead to savings on fees paid to the Singapore-listed entity. Profitability, currently the worst among large Indian hospital operators, would improve -- B&K Securities reckons Fortis's Ebitda margin would more than double to 14 percent after the Singapore acquisition.

While IHH's Singapore hospitals, Mount Elizabeth and Gleneagles, are state-of-the-art, Manipal has better credentials domestically. IHH, with 1,200 beds in India, isn't even among the top five.

To be sure, Manipal CEO Rajan Pai isn't making investors an offer they can't refuse. However, he has agreed to buy private-equity investors' stake in a diagnostics business part-owned by Fortis, and then merge it with the parent. By doing so, Pai is taking the risk of multiple probes into Fortis throwing up rude surprises.

For a company that needs to forget its founders, the TPG-Manipal-Pai prop is as comfy as a hospital bed can be.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

©2018 Bloomberg L.P.

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