Fortis Healthcare announced merger plans with Manipal Hospitals. The combined entity will have an extensive pan-India presence and will emerge as the largest hospital chain in India in terms of revenues. According to the proposed transaction, existing Fortis Healthcare (FORH) shareholders will: (i) retain a 36.6% stake in SRL; and (ii) gain a 33% stake in the combined Manipal + Fortis entity. This entity would hold a 100% stake in hospital operations and a 50.9% stake in SRL. This combined entity is planned to be listed separately. The transaction values SRL at 21.4x T12M Ebitda, which is at a discount to other listed diagnostic chains. For determining the share swap ratio or the stake in the combined entity, the hospital businesses of Fortis and Manipal are both valued at 30x T12M Ebitda. The valuations are largely similar on an EV/installed bed basis for both entities. As part of the transaction, FORH would get Rs 17.2 bn sales of stakes in SRL and RHT. Management indicated that this inflow will largely be used towards settling existing liabilities, interim capex and interest payments (primarily for RHT acquisition). This outflow is a negative surprise and diminishes the overall equity value for existing FORH shareholders, in our view. The transaction values FORH at Rs 121/sh on our estimates , which we set as our 12-month target price, implying 1.9% potential downside. We prefer Apollo Hospitals (APHS IN) (Buy) in our sector coverage. We present a preliminary five-year forecast for the combined entity. We forecast revenue and Ebitda CAGR of 12.4% and 22.2%, respectively over 2017-2022F.
Forecast and valuations
The financial forecast in this report doesn’t capture the impact of the impending transactions. The changes in our estimates are due to weaker financial performance over 9mFY18. Based on the proposed transaction value and prevailing valuation multiple for peers, we forecast a TP range of Rs 93-159/sh based on our bull and bear scenario.
The deal envisages: (i) FORH and other promoters of SRL selling a 50.9% stake to Manipal Hospitals; (ii) Manipal Hospitals merging with FORH’s hospital business; and (iii) FORH acquiring RHT as proposed, which in turn is funded by promoters of Manipal. o FORH will de-merge and transfer its hospital business to Manipal Hospitals. FORH will continue with the offer to the remaining stake in RHT which it announced earlier. FORH currently owns 29.8% stake in RHT. RHT assets will therefore be part of the combined entity and will be funded by the current promoters of Manipal Hospitals. o FORH, which owns a 56.6% stake in SRL, will sell a 20% stake to Manipal Hospitals (combined entity) for Rs 7.2 bn. Manipal Hospitals separately will buy a 30.9% stake from other SRL investors (mainly private equities). Thereby, Manipal’s stake in SRL would be 50.9%.