April 16, 2018 / 8:29 AM / 3 months ago

BREAKINGVIEWS-Ailing Indian hospitals warrant healthy bid action

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, April 16 (Reuters Breakingviews) - Eager buyers are doing the rounds with doctors in India. U.S. private equity firm TPG has backed one of three rival offers valuing scandal-hit Fortis Healthcare at up to 83 billion rupees, or $1.3 billion. The bidding for the owner of 31 hospitals across 10 cities in the country underscores the feverish demand for private medical care.

New Delhi’s lack of investment in public healthcare is a big factor for the frenzy. India spends just over 1 percent of GDP, the lowest of all the so-called BRIC countries. That should improve after implementation of the most recent budget, which envisions providing insurance for the poorest 500 million people. The state accounts for the bulk of hospital beds, but the quality of care is inconsistent.

As a result, private operators are driving expansion of healthcare revenue projected to grow at a 23 percent annual rate to $280 billion by 2020, according to India Brand Equity Foundation, a government-established trust. A growing middle class has led more Indians to seek treatment for problems such as high cholesterol and obesity. Lower costs also explain why top private hospitals, which tend to provide better care, attract patients from abroad.

Fortis’ portfolio would be hard to replicate. Suitors are circling after lenders seized equity pledged by the founders, the Singh brothers. Various fraud investigations complicate matters and help explain why the most compelling bid, a binding 155 rupees a share from rival Manipal Hospitals and TPG, involves a complex structure that attempts to ring-fence any fallout.

IHH Healthcare said on Monday that Fortis declined to engage over its higher offer. It is possible the Malaysian company could make a hostile bid, having stalked the company for more than a year. Two prominent Indian investors also have sensed a golden opportunity, offering to inject cash in exchange for a large stake, which could help Fortis stave off any potential liquidity problems. Their plan might work alongside Manipal-TPG’s offer.

Fortis is already trading at 19 times expected EBITDA, a substantial premium to peers including top rival Apollo Hospitals. India’s healthcare system may be poorly, but buying into it will require financial vigour.

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CONTEXT NEWS

- India’s Fortis Healthcare has declined to engage with IHH Healthcare over a potential takeover offer valuing the hospital operator at up to 83 billion rupees ($1.3 billion), the Malaysian company said on April 16.

- On April 11, IHH Healthcare proposed to pay up to 160 rupees per share for Fortis, subject to due diligence, Fortis said. That is potentially more than a revised and binding 155 rupees per share offer from rival Indian-hospital operator Manipal Hospital Enterprises, backed by U.S. buyout firm TPG.

- Fortis received a separate offer on April 12 to inject up to 12.5 billion rupees ($191 million) of cash into the business from two prominent Indian investors, Sunil Munjal’s Hero Enterprise and the private investment arm of the Burman family, which backs consumer goods producer Dabur India.

- A combination of Fortis’ hospitals business with Manipal would create the largest private hospital owner by revenue and EBITDA in the country, Fortis noted in a stock exchange filing.

- Fortis is under investigation by India’s Serious Fraud Investigation Office and the Securities and Exchange Board of India for financial fraud. The company’s founders, Malvinder Singh and Shivinder Singh, have denied allegations that they took funds from Fortis.

- The brothers now own less than 1 percent of the business after lenders seized their shares.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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