Manipal's revised offer for Fortis falls short of Street's expectations

Value of the hospital business is lower than Street's expectations

Private equity firm TPG backed-Manipal Hospitals has sweetened the offer to acquire the hospital business of Fortis Healthcare to address the valuation concerns of the latter’s shareholders, but it is still short of the Street’s expectations.

Earlier, the equity valuation of Fortis’ hospital business was pegged at Rs 50.03 billion. It has been revised upward by 21 per cent, or Rs 10.58 billion, to Rs 60.70 billion. At the revised level, it is nearly the same as Manipal Hospitals’ equity valuation. Fortis’ shareholders, who were earlier offered 10.83 shares in the merged entity for every 100 shares held in Fortis, will now receive 13.1 shares if the revised offer is accepted. The higher price translates to a per share value of Rs 117 compared with Rs 96-97 earlier. 

While this is closer to the sector’s average valuation, some analysts say the Street had estimated the hospital business of Fortis to be worth Rs 125 per share or even higher.

There are some comforting factors for Fortis’ shareholders. Its hospital business is expected to contribute 67 per cent to the revenues of the combined entity. But Manipal Hospitals is more profitable with an operating profit margin of 16 per cent versus Fortis’ 6.5 per cent. Under Manipal, Fortis’ hospital business can see better profitability. 

Analysts said Manipal had a strong record in operating large tertiary care hospitals, and a merger could drive significant operational synergies over the longer term, besides making the merged entity the largest hospital chain with a pan-India network.

Earlier, promoters of Manipal and the TPG group, which holds 20.7 per cent in Manipal Hospitals, were to infuse fresh capital worth Rs 39 billion in the merged entity to enable it to acquire the Singapore-listed RHT Health Trust. Under the new offer, following the merger of Fortis’ and Manipal’s hospital businesses, there would be a Rs 40-billion rights offer for all shareholders. The acquisition of RHT Trust will also add to profitability.

The concerns over Fortis’ diagnostic arm, SRL, also seem to have been addressed. Earlier, valuations of SRL were estimated to be at a 26 per cent discount to the sector. Analysts at Edelweiss had said there was limited clarity on the use of the Rs 17 billion cash generated from the sale of SRL stake and a future stake sale in RHT (Fortis should ideally return the cash to shareholders). The transaction will create a holding company for SRL, which is likely to attract a holding company discount, they said.

SRL will remain a subsidiary of Fortis. Analysts said it could be merged into the company later or listed separately. Either way, the majority ownership of the high growth potential business would remain with Fortis’ shareholders.

The Fortis stock, which gained 3.8 per cent intra-day, ended 1 per cent higher at Rs 147.65 on Wednesday.