MUMBAI: The brothers behind hospital
operator Fortis India know a thing or two about selling family businesses. Back
in 2008 they sold their stake in Ranbaxy, the pharmaceutical group their
grandfather founded, in a $4.6 billion deal.
But their latest move looks less shrewd. In a
surprise U-turn, Fortis India has decided to acquire a Singapore-based sister
firm -- currently owned by the brothers themselves. The market is unimpressed.
Shares in Fortis have fallen over 12 percent since the deal was announced last
month.
There are three reasons for investors to be
jittery. One is that there is an obvious difference of interest between the
brothers and minority shareholders. Malvinder and Shivinder Singh own 100
percent of the target, Fortis Healthcare International, and 80 percent of the
buyer. That means they will effectively cut their exposure to the acquired
group by a fifth -- while releasing $665 million of cash for themselves. The
brothers haven't said what they plan to do with that extra liquidity.
True, the price of $665 million, backed by an
independent valuation, looks fair. The implied enterprise value of 13 times
next year's forecast EDITDA is below similar transactions in Asia that went for
closer to 20 times. But that merely increases the worry that the brothers know
something other investors don't.
Secondly, it's not entirely clear these
companies belong together. Fortis has declined to put a number on the synergies.
There may be some cost savings in procurement and back office operations, or
some revenue gains if patients are more drawn to an international brand. But
the drop in share price shows that investors don't place great value on those.
Finally, there is the strategic reversal.
Fortis previously said it would focus on investing at home, and hasn't
explained the change of tack. The Indian operation has EDITDA margins of 12.8
percent, higher than the 11 percent margins of the business being acquired. India's
growth in healthcare is likely to outpace the mature markets like Australia and
Hong Kong that come with the Singaporean sister company. Overall, minority
shareholders would probably have got a better deal if the cash had been spent
at home.
Indian hospital chain Fortis Healthcare said
on Nov.1 that it would buy its Singapore-based sister firm, Fortis Healthcare
International, for $665 million. Brothers Malvinder and Shivinder Singh own 80
percent of the Mumbai-listed acquirer's shares, and 100 percent of the target
company.
Fortis Healthcare originally announced the
buyout on Sept. 21, but left the price to be set by an independent valuer,
Haribhaktri & Co. The valuation was set at $696 million, but the Singhs
agreed to accept less, the company said.
Fortis Healthcare shares were trading at
130.45 rupees by the close of Nov. 8. That represented a 12 percent fall since
the deal was first announced, but a 4.2 percent increase in the share price
since the full terms were disclosed.
The all-cash buyout, expected to be completed
by mid-December, would initially be funded by debt, and would increase the
Indian parent's total debt to above $1 billion, Malvinder Singh said.
Reuters
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