Fortis gets into sell-off mode

Coming after a spate of acquisitions in India and abroad, the strategy has analysts confused

Fortis Healthcare, the country's largest hospital chain, which recently sold its assets in Hong Kong for a whopping $355 million (about Rs 2,100 crore), seems to be overhauling its approach to doing business. This was the company's third divestment of overseas assets this year. The sell-offs at the healthcare chain, owned by former Ranbaxy Laboratories promoters Malvinder Singh and Shivinder Singh, are a sea change from the company's earlier aggressive pursuit of mergers and acquisitions all over the globe.

While the new strategy has helped the company trim its debt burden to some extent, it has also resulted in many people questioning its business plan and reevaluating their assessment of future performance.

"It is difficult to analyse Fortis. There is no transparency in its plans. It is difficult for investors to take a call because one does not know what will be its next move," says a senior healthcare analyst.

Fortis went into a buying spree in 2009, around the time when Executive Chairman Malvinder Singh quit Ranbaxy after selling it to Japanese drug maker Daiichi Sankyo. Malvinder, known to have a penchant for acquisitions, left Ranbaxy in May 2009; by August of that year, Fortis had bought ten hospitals of Wockhardt. There was no stopping Fortis after the Wockhardt deal. The company opted for an aggressive overseas acquisition strategy creating assets all across the world, including in Singapore, Australia, Hong Kong and Vietnam. Its most ambitious bid was the one to acquire 24 per cent of Singapore's Parkway Hospitals for $685 million which it later sold to Khazanah at a profit.

However, as most of these purchases were financed by debt, the company found it hard to sustain the strategy. Apart from its asset in Hong Kong, the company has sold two more healthcare assets-one each in Vietnam (Fortis Hoan My Corporation) and Australia (Dental Corporation). It had purchased the assets from one of the promoters' privately-held firms in 2011. The promoters, in turn, had lent money to Fortis which had piled up debt on its books to buy the assets.

At the end of 2012-13, Fortis had a total debt of Rs 6,471 crore, while cash and bank balances stood at Rs 512 crore and investments at Rs 1,187 crore. In the June quarter, its interest cost was Rs 100 crore, while its Ebitda (earnings before interest, taxes, depreciation and amortisation) was Rs 74.2 crore. Considering the huge interest outgo, analysts say, paying back loans will make a significant difference to the company's performance.

"Currently, it appears the company is focused on reducing debt and improving the balance sheet," says Baring Private Equity Partner Amit Chander.

According to Fortis, its latest deal to sell stake in its Hong Kong asset, Quality Healthcare, to British medical services group Bupa would improve its debt-equity ratio to 0.3, from 1.6 in September last year.

However, asset sales could also mean a sizeable reduction in Fortis' business. For instance, Quality Healthcare contributed a fifth of Fortis' June-quarter revenues, and about two-thirds of international revenues. With the sale of such assets, though profitability of the company is expected to improve, its revenues will decline. The Quality Healthcare business earned an Ebitda margin of 6 per cent in the June quarter, compared with 14.5 per cent for the Indian business. While in the near term, the divestment will reduce sales and profits to some extent, it also means Fortis will have more financial flexibility to run its business.

Fortis has maintained that it is evaluating its portfolio to ensure the right alignment and strategic fit, indicating there might be some more divestment of overseas assets in the near future.

Apart from selling off assets, Fortis has opted for other means to raise capital. For instance, it recently raised capital from IFC, StanChart PE and others to retire debt. In 2012, it raised around Rs 2,260 crore by listing one of its businesses, Religare Health Trust, at the Singapore exchange. Fortis has also transferred its healthcare assets to the trust creating a separate investment vehicle in a move to improve its financial situation. "The company has done an interesting financial engineering while creating the business trust to unlock its value to improve the financial situation," says Chander.

Though with a pinch of salt, investors have welcomed the new strategy. The stock, which underperformed due to concerns of high debt, has gained in the last three months following the decision to sell international assets.

Analysts at Macquarie say the sell-off will de-leverage the balance sheet and bring back focus to the domestic business. The transaction by them is valued at a healthy 25 times trailing enterprise value/ Ebitda. After the transactions, they expect the company's net debt to come down to Rs 600 crore from Rs 6,100 crore at its peak. The stake sale will also result in 95 per cent of the company's revenue coming from within India.

"The divestment clearly aligns our businesses with our stated priorities. We have taken a strategic decision to intensify our focus on our core hospital and diagnostic business in India with a clear path to profitability," say the Singh brothers.

OVERSEAS PURCHASES

2009: 10 Wockhardt hospitals

2010: Singapore's Parkway Holdings

2010: Hong Kong-based Quality Healthcare Asia

2010-11: Australia's Dental Corporation Holdings

2011: Vietnam's Hoan My Medical Corporation