Fortis has not been undervalued: Ranjan Pai, Chairman, Manipal Group

Ranjan Pai, chairman, Manipal Group, said in an interview that over the next few weeks, he will reach out to investors to allay their concerns.

Arijit Barman&Vatsala Gaur
Advt.

MUMBAI: Breaking his silence on the Fortis deal, Ranjan Pai, chairman, Manipal Group, told ET that over the next few weeks, he will reach out to investors to allay their concerns. Pai explains in detail how the ratios were calculated and why Fortis has not been undervalued… Edited excerpts

Are you disappointed with the stock market reaction?
People are possibly not getting the full picture because of the complicated deal structure, which is not our doing but that of the company. We would have also wanted a cleaner structure but we couldn’t…That’s why there has been no deal in the company for so long. People have not understood the breakdown of what we have suggested. Over the next few weeks, we will have to educate some of the investors. We don’t want people to think we are undervaluing this company or taking it for free. Our offer will be approved by shareholders, who have every right to reject what’s on the table.

Are you open to a revision of the offer?
That’s something I can’t decide alone. Our partners TPG also will have to take a collective call. But first, we need people to understand what we are offering. We need to communicate that and accordingly take a call.

What are you doing to soothe investors?
Some will reach out to us, some we shall reach out to. We haven’t started the process as everyone is absorbing it. The outreach will start from next week.

Why this structure as opposed to a clean acquisition?
The company is going through SFIO and Luthra & Luthra investigations; the auditors have not yet signed off on the account. The company needs cash because the operations have dropped and needs an immediate bailout. We were initially waiting for the findings but when we figured out that there is no fixed timeframe and some of these can take a week or a year, we felt this could be an alternative structure if we had to avoid the investigation. We tried a direct deal but could not. Our legal counsel AZB advised us against it.

Existing shareholders only get 33% in the combined business when EBITDA contribution is equal. Why should shareholders approve your offer?
Let me clarify that the two EBITDAs are not equal. Manipal’s EBITDA is Rs 250 crore while that of Fortis is around Rs 100 crore. We have taken the market cap of Fortis and made a sum of parts valuation. People have to realise that in six months, you need to pay Rs 3,500 crore to buy the Trust in Singapore. They have already defaulted on payments. If you don’t pay up in six months’ time, the entire company will lose its value. Then the investors of the Trust can cancel the contract and sell all the hospitals to someone else. You can’t assume that people are willing to raise Rs 3,500 crore in a company that has no promoter, that is going through a probe. Ideally, it would be great if all the shareholders put money but the fact is nothing was getting done. Given all that’s been going on, this is the best structure, the best option.

Why are adjusted numbers being used to calculate Manipal’s EBITDA while no adjustments or add-backs are there for Fortis while deciding on the ratios? Also, Fortis has 2x the number of beds and 2x revenue compared to Manipal. There is also significant brownfield expansion for Fortis in key markets. Were they considered?
Our valuation was based on the numbers that Temasek gave more than a year ago. We have not taken any mark-up on that. Being an unlisted company, I don’t have a mark to market advantage. If I had done it at a lower valuation, my existing shareholders wouldn’t have allowed it. We looked at Fortis’ market cap and we gave some advantage to the beds and then we have done the swap ratio. Yes, it is slightly in favour of Manipal, but we are a better run company, have less issues and we have a benchmark through an external validation. Fortis also got an external validation given all the things that are going on in the company. They have kept some value. We have given them 20 times EBITDA multiple.

How much time did Fortis get to do a due diligence with Manipal? You had more than 18 months to do that for Fortis, which is also listed. How did the Fortis board clear a deal in less than a week after receiving an unsolicited offer from you?
They have relied heavily on the references and warranties from us and the last valuation that Temasek gave us. Karvy did independent valuation for both the companies.

Considering Yes Bank is the single largest shareholder now, has Yes Bank blessed the deal?
They spoke to us today and wanted to know our position. We are meeting again next week. I don’t want to be seen as someone hurting the minority investors. There is a lot of work that needs to be done in the company. We have done enough diligence for over a year. If the shareholders approve us, then we would like to take up the challenge and build this company. We want these investors to stay long with us.

What are your thoughts on management integration?
After shareholder approval, we will evaluate the management teams. There is a lot of synergy and potential for both the platforms. So I am sure there will be interesting opportunities for all.

The value accretion from the REIT acquisition should accrue to Fortis shareholders. Instead, now it is accruing to the combined entity. Is that fair? What’s the value-add that TPG-Mnaipal has done?
TPG-Manipal are putting money in the REIT. The only way existing shareholders could benefit was that before we came in, they would buy the REIT. But, here we are putting in Rs 3,500 crore; so we should get the benefit as well. Actually, everyone benefits thanks to us. If the REIT doesn’t come into Fortis, then it will be overvalued. Today without it, it’s at a far higher multiple. We have combined both, assuming the REIT being brought in. Without it, the Fortis multiple would come to over 50 times.

The board has only three members now. Do you believe that perhaps it would have been better had a new independent board been put in place to evaluate the transaction?
I understand but tell me which board member will come on board if there is an SFIO investigation ongoing? There is no credible board member who is willing to join. To be fair to the board members, they were also concerned and made sure that there is an independent and fair valuation report. The company has been on the block for the last two years; this is not something that has been cooked up in days. We would have liked if it were a larger board, but the luxury of that was not in our hands.

Do you believe the Fortis shareholders will now be left with a holding company that will attract a discount?
We were talking about that trying to figure out how to solve that issue. One thing is that after the SFIO investigation, there could be a way where we could probably look at merging the holdco into our company.

When do you expect to have clarity on that?
We don’t know. Some investigations can take weeks; some even a year. This is a distressed company but not distressed valuations.

Do you believe there will be counter offers from IHH and others?
The reasons why many of the strategic companies (read IHH) have been hesitant are still very much there. The investigations are still ongoing. I cannot talk on their behalf but I would assume that their concerns would remain.

The promoters of the company, the Singh brothers, are in distress and not the company. Do you believe a fire sale was the best way out?
The company is also in distress because I think some of those issues have rubbed off onto the company as well. Given the regulatory headwinds, I think this is the fair value of the company.

What are the next steps?
The first thing that we have to do is to make sure that the shareholders are on board. We want to assure them that we are here to build long-term value and, more importantly, to make sure that we carry all the shareholders with us. First we need to get the shareholders’ approval to convince them and we need to make sure that there is the highest level of corporate governance, going forward, with this company.

You need the majority of the minority votes in this case, right?
Yes, which is pretty much 100% that are present and voting.

What’s the timeline for that?
We will call for it in the next 45 days. But in the next two weeks, the EGM notice should go out. We also want to proceed and help only if there is clarity with the shareholders. In those 45 days, we will try to meet them and talk to them and explain it to them.

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