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Jul, 03 2018

Fortis fresh binding bids due Tuesday, board sets evaluation terms

Bidders will have to disclose the source of their funds to finance the transaction, including firm commitment letters from lenders and plans for retention of current management and employees, said people involved in the transaction.

Bidders for the Fortis chain of hospitals will have to cough up a minimum investment of Rs 1,500 crore by way of preferential allotment as the Fortis HealthcareNSE 6.32 % board has stipulated certain conditions to ensure that only “serious” binding offers are made by the Tuesday deadline.

The other conditions include a detailed funding plan for the acquisition of RHT Health Trust, the separately listed Singapore-based trust that holds Fortis’s real estate assets, with a long-stop date of September 30, 2018, and a blueprint for the diagnostics arm SRLNSE 0.00 %, including an exit strategy for private equity investors who own a third of the unit.

Bidders will have to disclose the source of their funds to finance the transaction, including firm commitment letters from lenders and plans for retention of current management and employees, said people involved in the transaction.

Experts said prospective bidders may revise their final offers after allegations of financial misappropriation, brand ownership and related-party transactions surfaced recently following a probe by law firm Luthra & Luthra. The Delhi government has announced a cap on hospital margins from this year, which may adversely affect the Fortis top line by Rs 50-60 crore annually.

Fortis Healthcare’s quarterly audited results are due in the next few days.

Sources said Yes Bank, the single largest shareholder in Fortis, has proactively engaged with the new board to ensure a transparent evaluation.

However, others said there will be a keen contest.

“The company’s numbers are flat compared to last year and now there is clarity on the controversial transactions. So it may be logical to assume that bids will improve,” said another official.

“If offers are revised, they would be on the higher side,” said Manoj Patkar, executive director and partner at investment banking firm 7i Advisors. “There have been past compliance issues because of the erstwhile promoter group, but that does not actually have any effect on the basic business fundamentals of this asset.”

The Fortis board was reconstituted after a group of minority shareholders objected to the way the bidding process was conducted. On May 29, the new board of Fortis initiated a fresh bidding process for a deal after the Munjal-Burman consortium, whose bid was chosen on May 10, gave their consent.

There were four bidders in the fray previously – Malaysia’s IHH Healthcare, TPG-Manipal, KKR-Radiant and the Munjal-Burman combine – and they had submitted various competing offers and financial structures.

The Munjal-Burman combine had offered to invest Rs 1,050 crore upfront through a preferential allotment of equity shares (Rs 167 per share) and warrants (Rs 176 per share). They also proposed to infuse an additional Rs 750 crore of warrants after receiving shareholder approval.

TPG-Manipal had proposed to infuse Rs 2,100 crore through a preferential allotment at Rs 180 a share, which would allow it to pick up 18.4% stake in Fortis at valuation of Rs 9,403 crore. It planned to buy out SRL’s PE investors for Rs 1,113.4 crore. In the third stage, the consortium led by Ranjan Pai suggested it would merge Manipal Health Enterprises with Fortis Healthcare through a reverse merger after restructuring the SRL board.

IHH had planned to put in Rs 7,400 crore for an over 50% stake in Fortis at Rs 175 per share, while KKR-Radiant proposed to purchase only the Mulund hospital at an enterprise value of Rs 1,200 crore, which, it said, would provide immediate liquidity of Rs 680 crore to Fortis Healthcare.

As part of its non-binding offer, it proposed to spin off SRL so that Fortis could run an independent competitive sale process. It also proposed a demerger of the hospital business into a new company excluding Fortis Healthcare’s stake in so that Fortis could run an independent competitive sale process. It also proposed a demerger of the hospital business into a new company excluding Fortis Healthcare’s stake in SRL and said it would launch an all-cash open offer for shareholders of this new company at Rs 126 per share, provided Radiant-KKR had acquired 26% or more stake of this via an open offer or preferential allotment.

“The board will primarily look at valuations, deal certainty, structural simplicity, timeline along with the funding capabilities,” an executive familiar with the developments said on condition of anonymity. “The reverse merger of Manipal will take longer than a clean transaction suggested by IHH. Similarly, the Munjals have to up the initial capital commitments. The company has immediate liquidity concerns.”

Standard Chartered Bank, Arpwood Capital, Cyril Amarchand Mangaldas and Vaish Associates are advising Fortis.

Fortis chairman Ravi Rajagopal declined to comment on the matter.

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