GEM Healthcare - IHH Healthcare Berhad: Fortis deal

Fortis shareholders approve the IHH acquisition

IHH Healthcare Berhad has announced today that Fortis Healthcare Ltd India shareholders have approved IHH's takeover of Fortis. The statement has stated 99.7% voted in favor of the deal. Fortis shareholders approved the infusion of 4,000 crore rupees (circa RM2.35 billion) from IHH in exchange for a 31.1% stake in the company,.The transaction is now awaiting other regulatory approvals. 

The Fortis deal

According to IHH's previous announcement, the company "...would acquire Fortis through a preferential allotment at 170 rupees per share. Under the terms of the deal, following its 4,000 crore rupees investment, IHH will then make an open offer to buy up to 26% of the shares held by existing shareholders, which could raise its stake to as much as 57% in Fortis, depending on how many shareholders participate in the open offer."

Would India pay-off?

India is a massive market but one which is very highly regulated. The margins are probably the lowest one could earn in any emerging market. The management has articulated a plan but there is significant execution risk. Raising EBITDA margins from 4-5% to 13% is a challenge. Eliminating related parties without disrupting the supply chain may take longer and reducing cost of financing may prove harder in this market. Even when everything goes according to plan, it is a wait too long; and with significant margin dilution. 

Turkey plans revisited on Lira devaluation

Acibadem, IHH"s Turkish subsidiary, generated 31% of group sales in 1Q18. Turkey has also been the number 1 growth driver for IHH since the acquisition. Thus, Turkey matters. IHH already added US$250 million into Acibadem's balance sheet for debt retirement earlier in the year, which has boosted the subsidiary's Tier-2 capital. IHH has also postponed its expansion plans in Turkey to reduce stress arising from currency risk. The company is planning to raise Turkish Lira debt instead. IHH/Acibadem may also consider making some capacity redundant to improve efficiency. It is likely that the project to upgrade Atasehir business will be shelved. Istanbul Kartal project may also have to wait.