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A wholesome deal?

Only time will tell if Fortis's acquisition is in shareholders' interest

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With the recent acquisition of 23.9 per cent of Parkway Holding for a price of $959 million, Fortis Healthcare has become the biggest private healthcare company in South Asia. This stake was purchased from the private equity firm TPG Capital, which is Parkway's single-largest shareholder. After this deal, Fortis intends to seek four directors on the board of Parkway. It will also nominate Malvinder Mohan Singh as chairman. Parkway Holdings is a leading provider of healthcare services across South Asia. The company is listed on the Singapore Stock Exchange.

Pros and cons
Analysts have divergent views about the acquisition. Some consider it unnecessary since there is a lot of scope for growth within India. Others disagree. According to Rashes Shah, Pharma analyst at ICICIdirect, a brokerage firm, “Though the hospital market in India has seen very low penetration (0.9-1 bed per 1,000 population), basically there is an acute shortage of beds in tier II, tier III and other rural areas, not in the metros.

Considering the long gestation period of hospital projects in these areas, investment by private players is not feasible. Hence, in these areas the government has a greater role to play.” Therefore, if the metro markets are saturated and rural markets are not profitable, it makes sense for private players such as Fortis to venture abroad, argues Shah.

While many consider the deal to be expensive, Shah is of the opinion that the premium over the market price paid at the time of the acquisition is justified if one compares the operating margins of the two firms: Parkway's is almost double compared to that of Indian healthcare providers.

Some analysts believe that there are very few direct synergies between the two companies. But according to Shah, “We believe this acquisition will give the combined entity the benefit of an unparalleled medical talent pool in Asia and access to best-class practices, thus creating synergies that will help offer global quality healthcare experience across regions.”

Experts have pointed that with this acquisition Fortis has managed to kill two birds with one stone. Not only will it have a global footprint, but Parkway, which was growing fast in the Indian market, will not be a competitor any more. According to a Citi group report, “Fortis has only one directly comparable company listed on the Indian market - Apollo Hospitals.”

Will it work?

A recent McKinsey report on what it takes for mergers and acquisitions to create value for shareholders states: “For shareholders the sad conclusion is that the average corporate-control transaction puts the market capitalisation of their company at risk and delivers little or no value in return.” There is no standard outcome for such mega-deals: some succeed and others do not.

What should you do?
Fotis's debt exposure will increase with this takeover. However, the debt-to-equity ratio will still remain under control at 1:1. Though Fortis's operating margin is nearly double that of its competitors, that does not justify its current 12-month trailing PE of 459x (on March 23, 2010), the highest among peers. Given its current fancy valuation, look at the stock again only after the exuberance around the deal dies down and the outcome of the acquisition becomes visible.

Fortis Healthcare before and after
  Before Acquisition  After Acquisition
Hospitals 46 62
Beds 6,600 10,000

Past Acquisitions
Earlier, in January 2009 Fortis partnered with Mauritian Industrial Group CIEL, through its subsidiary Novelife, to jointly acquire 58 per cent stake in Mauritius' Clinique Darne for $7 million (approximately Rs 35 crore).

In August 2009 Fortis bought 10 hospitals from Wockhardt for Rs 909 crore.