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BW Businessworld

'What More Can We Do To Give Investors Comfort?'

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Brothers Malvinder and Shivinder Singh have been at the receiving end of investor's ire ever since they announced that their listed firm, Fortis Healthcare India, will raise debt and pay Rs 3,150 crore ($665 million) in cash to buy out the Singh brothers' private firm Fortis Healthcare International.

Minority shareholders have been up in arms, raising issues of corporate governance and accusing the family of profiting from the deal at the expense of the listed company. Shareholders have also said that the firm's profitability will be hit as it will need to borrow at a time when interest rates have peaked. The company's stock has taken a beating too, dropping 35.28 per cent, from Rs 141 (on 19 September, when the deal was announced) to Rs 91.25 (on 22 December 2011) on NSE.

In an interview with BW's Suneera Tandon and Rajeev Dubey, a combative Malvinder Singh, group chairman of Fortis Healthcare, breaks his silence to defend the deal. He reasons the rationale, allays investors' apprehensions and rejects the idea of questionable corporate governance. He also lays out how the company will get back to a healthier debt-equity ratio before the end of this fiscal. Excerpts:

The biggest issue is whether the price at which you sold Fortis International is higher than what it has been created at. Have the promoters benefited?
Firstly, promoters have not benefited and, secondly, this deal is at cost. Analysts and investors don't know how to look at it and value it. When they look at a grey box, they tend to look at the lower end of it. Shareholders should understand things before they start jumping into conclusions or coming out with a half-baked idea and saying this is what it is. There is a bridge between the (creation cost of) $580 million and (sale price of) $665 million. If you look at enterprise value (EV) to Ebitda (earnings before interest, taxes, depreciation, and amortisation) as a multiple, we have done it at a multiple of March 2012 (projected number). It is in the range of 12.5x-13x. From a competitor's perspective in healthcare in India or Asia, every deal in the past 18-24 months has had 20-30 multiple of EV to Ebitda - be it Parkway or Max or Thompson, and that is the market price. So if you are looking at market rates, this would be valued upwards of a billion dollars and that is the price the family could have got had we gone to a third party.

The $580 million is the acquisition cost of all that we have done. And then there is an incremental capex and money we have pumped into those firms. Then there is a transaction cost, interest ($23 million) and management cost. So the $665 million is the sum. The transaction-related expenses were $22.71 million on the base acquisition cost of $575.85 million. The addition capex was $37.79 million and there is some carrying cost, all these come down to the bridge. All that put together makes the $665 million.

Fortis Healthcare India and International
Business: Integrated healthcare services in Asia Pacific
Presence: 10 countries, including India, Australia, New Zealand, Hong Kong, Mauritius, Canada, Singapore, Sri Lanka, etc.
No. of hospitals: 74 (including owned, managed and projects)
Workforce: About 23,000

So, if it is $665 million or $697 million or higher, this is what we are building as a sustainable business and I want to do it right. Even if we have done the right thing, there seems to be a lot of noise and one needs to deal with it and address it.

But when you are both the buyer and the seller, there is an issue of corporate governance.
If I go by market multiples, the value is $1.2 billion. We have not done that. We had appointed two valuers - one done by the Indian company and another by sellers. We are on both sides, at 81 per cent in one and 100 per cent (in the other), so we had to step aside. They had many meetings, appointed valuers and came up with the value. We said we had been conservative and had not looked at potential synergies of putting it together.

We have not looked at control premium and a scarcity of such assets in the market as they will make the numbers crazy. They came with a figure of $695.7 million. At the board meeting, Shivinder and I took a call that we do not want to profit from this. We will reduce the price, as we are the sellers, to our cost price, which is $665 million, and that is what we announced.

The SRL deal is another example. We sold it into Fortis at the price of $187.5 million. We moved it into Fortis because we wanted to create an integrated healthcare model. Which was a decision we had taken as wanted to be international and integrated; so that journey started earlier. Within a month, we got $200 million plus in private equity and shortly after we got another one at a higher price. Today, I have multiple offers at an even higher price, so who has benefited, Fortis or the family? Fortis. If I wanted to make money, I could have got private equity and then flipped it. I did not do it.

How do you view the current deal strategically?
It is transparent and substantially lower than any comparative (deal) in the market. The larger strategic objective is to make sure we can combine businesses and have a single entity in healthcare. It is not effective to have multiple entities. Strategically, there is a huge merit if they are all together. It is not about how much money I made in the deal, but about what is right for the business and how quickly we can do it.

Why was the international entity created privately?
About 18 months ago, we had an open offer from Parkway, when the family came in to support Fortis Healthcare. We created Fortis Healthcare International to avoid stress on the Fortis balance sheet. There was uncertainty at that time. We had made an initial investment in Parkway at 25 per cent and the offer was for 100 per cent of the firm. The numbers were quite large. We said we will take 51 per cent of the entity, and took the pressure on ourselves. When we got the money (as the deal did not work), it went back to Fortis, not to the family. But I stepped in as I needed to support it. Fortis was protected from risk, but made economic gains from the deal.

When we did the open offer, we thought the whole scheme was that we were going to put everything together. When we sold our stake in Parkway, we thought we would keep the India and International stake separate, use balance sheet and human capital of India, and scale up and build international. In just one year, we have done things at a rate much faster than we anticipated. In terms of countries we entered, and verticals and businesses we have acquired, each business is a leader in their area -- Hong Kong-Quality, Australia- Dental Corp, which is the largest chain of dental clinics; and so on. In West Asia, we are the only path lab with capability and scale.

We have ensured what is right for the company and shareholders. So the strategic rationale was clear and it was the right time to do it. Or, at some point of (Fortis Healthcare) International's growth, when I bring in an investor at the market multiple, even as a majority shareholder, I won't be able to give it at cost and the price I want as I am also a 100 per cent owner.

Haven't minority shareholders discussed their concerns with you?
They have; some of the big FIIs. They understand the strategic intent and they like it. Their questions today is "why are you doing it in cash?"

CARE BIZ: Fortis Healthcare India will raise debt and pay Rs 3,150 crore in cash to buy Fortis International

Why did you do it as a cash deal involving debt, not equity?
I am at above 75 per cent already, so if I do equity (merger), I will be sitting at above 95 per cent. Sebi won't allow that. There is a timeframe by which you have to come down from 81 to 75 per cent. We have foreign currency convertible bonds of $100 million, due for conversion in a few years. When it happens, we will be at 76 per cent. We will be compliant at the time when we need to be. Had we been sitting on 30-50 per cent, it would have been a no-brainer. We would have loved to do it by equity. The only option is cash. If we don't do it today, it will come at a much higher price. Frankly, I don't have a choice. The market is sitting at twice this price. Because I have to do it in cash, on a temporary basis, there will be a spike in debt equity ratio, but I also have a clear plan to get it corrected.

Higher debt in the listed entity is a big concern.
Do I have a plan about it? They (investors) want to know that. To an extent, I have shared it. Beyond that, I can't. Do I know what I am doing and how I will bring it down to 1:1? It will be done by March 2012. The debt equity in the entity is slightly under 0.5. By December end, when the transaction closes, we will be at 1.5:1. Is it higher than where you would want it to be? Yes, but temporarily. It is only there to close the structure. And there are a bunch of things we are going to do to get back to 1:1.
You look at the debt-equity ratio at 1.5 and wonder how to correct it. If I were in your shoes, I would question it. But if I am able to explain to you how I will bring it down irrespective of where the market is, it doesn't matter. Some will buy it and some will wait and watch. I am not worried about it. It is already in an advanced stage.

Each of our investments is strategic from the both the geographical and vertical perspective and how we will use that as an entry point for each country and scale capability, expand across verticals and leverage that capability into other markets. It is a well thought out plan. We have been able to add value to these assets. We have created a global management team sitting in Singapore. The India management is a country management (and in the past they were the corporate management). We clearly reached the size and scale. In India, there is huge growth and opportunity. But I can leverage the expertise of India to international markets. Likewise, I can leverage the knowledge, talent and expertise of the international business model into India. To make sure you can optimise growth and talent, leverage the vertical knowledge and have efficiency and synergy, it was imperative to put all of it together because if they are toe independent, it is not going to happen effectively.

The business we have as of today a sizeable amount is outside India. In India, we have primary care, diagnostics, day-care specialty, secondary and tertiary care hospitals. Others are all outside; the knowledge, experience, capabilities and value are moving (from the International business) at cost to this (Indian) shareholder, they should be happy. My focus is on emerging and developed markets.

Strategically, I will focus on growing and investing in most of these markets. We will expand in West Asia through management capability and not through investing. In Sri Lanka, we will invest. We collaborate with the government, and will get into a bunch of areas. In Vietnam, we will expand and invest in. So will in Singapore and Hong Kong. US, Canada and Europe are all dental and I will leave them at that. Markets like Hong Kong and Singapore are hubs and here you are not catering to just the local population, but also to a much larger market. Hong Kong will be my entry to China over a period of time.

So, what is the plan to correct the debt-equity ratio?
SRL third round (of private equity infusion in the diagnostic chain). We are also looking at an asset-light model. It is about having more cash on the balance sheet and less assets. What we intend to do and what is in the market at this point are different. They are just trying to gauge and guess. They don't know what I'm doing. By March end, I will be at 1:1. I am comfortable at that.

Are you still trying to convince the minority shareholders or is this it?
We have done a road show. We have spoken to and are still speaking to them. They will take a certain time to understand. We have not given a forecast, so some people are trying to figure out what it means in terms of financials for the new entity. We have never given any forecasts in the past.

But when we close the transaction, may be, we can talk about it. Also, I don't see what we could do more to give people the comfort. First, you are putting everything together; secondly, you are doing it at cost and you are doing at a price point which is far cheaper than market rates. So the ability to do it today and at the price at which we are doing it is going to benefit the shareholder.

In today's market, people tend to be short-term focused and they don't want to take a risk. If there is an unknown, they want to discount it. So there is probably a part of that at play.

I do not want to be a one-country player anyway. India has great volume and capability, but it is not top-end, I can bring that in. Once I own it, run it and manage it, I can move people to learn, develop, explore and to understand it. India has huge value, which I can take out into other emerging markets and leverage the Indian capability, but International businesses have what India does not have. So I can bring it in and make my product and service much better for my patients or get into areas which are not in India today. So that is my value and growth and I need to do it because I am convinced, strategically, that it is the right thing to do.

Now, if global players enter India's healthcare market - be it our competitors in Asia, South America, or PE players, they will bring multiple assets and align them. If I remain in India play, I will lose out over a period of time. So I cannot be only in India when the whole world is having India as their strategy. So, I need to be more expansive within the areas which are going to grow and add value. Rather than having two separate businesses… we will put them together. If I remain India centric for short term, it might be good and not put pressure on my growth. My numbers would look attractive in the short run. But is my job short term? Or is it strategic from a sustainability perspective?

How much should minority shareholders be heard, since you are 100 per cent in one and 81 per cent in the other?
This is a two-way street. You have to hear them out. We have always engaged them. But the issue is not "why you are doing it?" They understand it. For some, it is a sudden move; for those who have been following it in detail, this is not a surprise. There are a group of key investors who have been there in the past, and who were investors in Parkway. They have known the story and have held on.

It is important to segregate the noise in the market and look at the issue objectively and understand it in its totality. We continue to reach out to various stakeholders. The global economy is not in the strongest position. The capital market sentiment is not where any of us would like it to be. So, when someone does not understand something, they tend to take a more cautious, risk-averse path. But this is a great opportunity to be able to put things together and become stronger and grow faster.

(This story was published in Businessworld Issue Dated 02-01-2012)