LIVE CASE STUDY : Fortis and Manipal Hospitals Merger Deconstructed

We are on the brink of witnessing a big merger in the healthcare industry, which will make the Fortis-Manipal merged entity as the chain with the largest number of hospital beds in India! It will also enable  Manipal Hospitals to get listed on the stock exchanges without following the procedure of filing an IPO or any other document related to listing.

It’s a very interesting Live Case Study that we present to you, one which gives us business insights, valuation insights and maybe also a chance to profit from this entire ordeal.

A Merger And A Demerger – Both in a Single Deal to Avoid a Plethora of Legal Issues

The company is going through a bad phase, promoters of Fortis Healthcare Limited (FHL) are facing several allegations over the last 2-3 years & their profit has been slumping. The complication was as follows – To make an investment in a Greenfield project, they had obtained debt from a consortium of lenders including Yes Bank. The promoters had pledged their shares for the same. They were unable to service the debt, which made them lose their holding from FHL giving away their shares to Yes bank.

Moreover, the continuous complications, post the sale of Ranbaxy labs to Daiichi Sankyo persistently were disturbing the operations of the hospital business. Recently the promoters (the Singh brothers) were in the news for Rs. 500 crore that they took from the business for their personal use. Even the auditors of the company have denied approval to the financial results of the company.

Nobody would ever want to acquire an entity that is facing many issues within their company. Merging the whole business with another company will make both the entities face the same trouble. Therefore, FHL is transferring its business to La Femme (a subsidiary of FHL) and with this; they will demerge the whole hospital business. Subsequently, La Femme will merge with Manipal Hospitals.

TPG – The Mastermind Behind The Biggest Deal in the Indian Healthcare sector

TPG is an American investment company, generally in the private equity funding business, is looking at the healthcare industry of India since a long time. They see the healthcare sector in India as one of the booming sectors in upcoming years.

The Manipal – Fortis deal is taking place due to TPG, who wants Manipal to take a step forward and merge with FHL. TPG-Manipal saw a great opportunity to kick off this deal as FHL was not doing well because of the company’s inconsistent model of growth and an absence of consistent leadership, coupled with its current spate of lawsuits and alleged malpractices done by the Singh brothers.

TPG is investing around Rs. 2,100 crores in this deal whereas Rajan Pai is investing around Rs. 1800 crore in cash. This deal will make Rajan Pai the king of healthcare business in India. As this will become the biggest company in healthcare sector beating Apollo Hospitals as the company having the most number of beds.

The table below shows the investments made by the TPG Group in the Indian Healthcare Sector over the years.

Significant Synergy Potential

As we know FHL is strong in North India and Manipal is strong in South India, merging these two will make them capture the whole healthcare service market across India, also they are well-recognized brands in their region.

Manipal business is backed by reputed promoters and PE investors and they are recognized for their safe and ethical medical practices. As per management comment, Manipal-Fortis’s (Merged Entity) EBITDA margin will expand by 150-250 bps from its current level of 14.2% with help of reduction in the pharmaceutical, administrative expenses and also reduction in cost through shared services and infrastructure.

Manipal and FHL both have invested significantly in greenfield and brownfield bed capacities to support future growth. Now we will see synergies on the capex front through the sharing of high-end medical infrastructure in core markets.

Structure of the Companies Involved

FHL operates its hospitals under a “Hospital and Medical Services Agreement” (HMSA) with RHT . RHT invests in and owns the fixed assets of the hospital business and FHL invests in medical equipment and operating the hospitals. Therefore FHL has an asset light model and it becomes imperative for Manipal Hospitals to acquire RHT in order to gain control over the entire business.

Decoding the Puzzle of Demerger and the Subsequent Merger


From the above shareholding pattern, we can see that the entire stake of shareholders of FHL gets diluted to one-third of the total shareholding in the merged entity.

So by picking any one of the FHL shareholder’s quantities we can find out the total no. of shares of that shareholder in the merged entity and correspondingly the total number of shares of the merged entity. Thereafter we get the value of Rs 97.59 per share, which is the value that Manipal Hospitals has quoted for FHL.


The assumption being made that Amount of Rs 3900 crore which Ranjan Pai and TPG Capital can be spread into different business of FHL 

Is the Offer Too Low for  Fortis Minority Shareholders?

Now looking at the most complicated part where most of the people are confused and many people are of the opinion that the FHL is undervalued in the deal. The share saw a downward movement of around 13% after the merger news.

Initially, the expected value of FHL was close to Rs 200 per share, however, as the round of discussions progressed; the valuation kept decreasing to around Rs 180, followed by about Rs 160 and eventually to Rs 135.

Shareholders who bought on hopes of an open offer at a premium to market price are disappointed due to it is a merger. Post merger, TPG and Rajan Pai combine will hold a stake of 58.6%. The minority shareholders are also disappointed due to the limited financial and operational information available on the Manipal Group. So it’s also difficult to justify Manipal Hospital’s valuation.

On the other hand, the reason given by both the managements is the same, that in the recent past, FHL has not been doing well while Manipal has been growing in the last 18 months which is why FHL valuations are low.

Peer Comparison

Now let’s have a look at how FHL is being valued when we compare it with its peers…

Note: Assuming that cash from the sale of 51% stake of Fortis Hospotel (i.e. subsidiary of RHT health trust) asset will come into the FHL Business.

*Including RHT

^ Apollo hospital business revenue and EBITDA calculated as (consolidated EBITDA – standalone pharmacy business EBITDA) and also consider hospital business M-Cap i.e. excluding Pharmacy segment on the basis of EBITDA weight

So here while calculating we are getting the valuation of EV/EBITDA of 25X but as per the management conference call, they are adding the minority interest of RHT business. Factoring that in, the EV is coming around Rs. 7,300 crores and EV/EBITDA by 30X which is valuing both the entity at the same level.

While going through the above valuation parameters we can see that Fortis Hospitals has been squeezed from all the sides, whereas  Manipal Hospitals has been valued highest compared to every other peer in above table. Narayana Hrudayalaya Limited (NH) which is known for their low profitability business operations has also been valued more than Fortis Hospitals in many parameters. From this, we can make out that Manipal is keeping its valuation high but judging fully based on above table would be wrong as Manipal Hospitals is performing well over the last 18 months whereas Fortis Hospitals is being criticised badly in the same tenure.

Fortis Healthcare Limited Business Post Demerger

Now let’s have a look at the SRL Diagnostics (SRL) which is the subsidiary of Fortis Healthcare Ltd till date. FHL owns 56.6% stake in SRL. But after the demerger, TPG- Manipal (Merged entity) will look to acquire a majority of stake where the promoter of Manipal proposes to give Rs. 720 crore for 20% stake for SRL diagnostics and for another 30.9% stake they are in talks with other shareholders.

Apart from this we also assume that cash received from sale of 51% stake of Fortis Hospotel (i.e. subsidiary of RHT health trust) asset will come into FHL’s books.

After this deal FHL will be left with a stake of 36.6% in SRL Diagnostics. Their stake in the business will drop below 50%, therefore FHL will just remain as a holding company, thereby its shares are likely to trade at 20-50% discount.(Holding company share valuations occur at a discount from the current market price of its held entity)

Now, look at the valuation of SRL when we compare it with its peers…

So here when we look at the valuation of SRL Diagnostics Business the more or less they have been valued at a similar value, the reason being if we see the margin and compare it to another peer it’s low. A basis that, its value seems pretty comparable.

In a conference call, the management was talking about Rs. 1,700 crores coming into FHL because of stake sale SRL, followed by RHT but that cash will be utilized to pay around debt at FHL’s level and will also be utilized for business operation. They will have around Rs. 500 to 600 crore cash in hand after the deal basically including the repayment of debt and so that is what envisaged by the FHL management.

Therefore the final call for sensitivity analysis has been taken based on management comment however we are not satisfied with management comment about cash in FHL after demerger which will be very less left in the business as against our assumption.

Sensitivity Analysis: Value of Fortis Healthcare after Demerger and the Listing of the New Entity Manipal-Fortis

The difficulty people face is to judge when to enter the market and when to exit. The sensitivity analysis below shows us how much we can earn and lose at different entry-levels by buying 102 shares of FHL.

Entry level (Rs.)   160 155 150 145 140 135 130 125 120
Total Investment amt (Rs.) 16,320 15,810 15,300 14,790 14,280 13,770 13,260 12,750 12,240

So if we have 102 shares now of FHL that means after merger we will get 11 shares of Manipal Fortis (Merged Entity) and we will be left with 102 shares of FHL and fractional amount of Rs 42 in cash.

From the sensitivity analysis below, we can see how the price movement of FHL (Row) and Manipal Fortis (Column) moves

From this sensitivity analysis, we can see how the price movement of FHL (Row) and Manipal Fortis (Column) moves.

According to us the value of your investment could be in the range of the greyish portion of the table after the demerger takes place.

What Could Be The Potential Hurdles In The Execution of The  Deal?

The first question that arises here is whether the shareholders of FHL will agree to this merger or not. The answer can be yes, they can agree to this deal because the company is making a loss from the last two quarters and more internal issues and litigations against the business can make investors go for a demerger.

The reason that will act as a constraint, however, would be that the valuation of FHL is very complicated and moreover it is not yet clear as to which entity will the cash that will be received from SRL & RHT stake sale go.


Risk Warning & Disclaimer: The information contained in this website is for informational purposes only and does not constitute financial advice. The material does not contain (and should not be construed as containing) investment advice or an investment recommendation, or, an offer of or solicitation for, a transaction in any financial instrument.

-Report by Chirag Gothi with assistance by Rahul Goyal