Fortis Healthcare (Fortis) announced a composite scheme of arrangement which, via a multi-step process, will move SRL out of Fortis into Fortis Malar (a separately listed entity) and move Fortis Malar’s hospital business into Fortis Healthcare .
The idea of the scheme is to allow two different verticals – hospitals and diagnostics – to run independently and unlock value for shareholders. The deal will require various regulatory and statutory approvals and will take 9-12 months. Fortis Healthcare will acquire the hospitals business of Fortis Malar for R430 million in cash.
The Fortis diagnostic business (SRL) will be demerged to Fortis Malar (FMHL, R53.40, Not Rated), for which Fortis Malar will allot shares to Fortis shareholders (swap ratio: 0.98 for every share of Fortis). We value Fortis’s hospital business at R158 per share, based on 19x EV/EBITDA (comparable to Apollo) after including some contribution from Fortis Malar hospital. Combining the two, the proposed de-merger appears to offer a base value accretion of c13-15%. The FHTL transaction closure should show positive results on EBITDA. SRL’s de-merger will follow that over the next few months.
Besides, we think Fortis’s businesses are moving in the right direction with a focus on improving case mix and increasing O&M (operation & management) share. We maintain our DCF-based TP of R224 and Buy rating.