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Keeping it in the family

8 November 2011 By Jeff Glekin

The brothers behind hospital operator Fortis India know a thing or two about selling family businesses. Back in 2008 they sold their stake in Ranbaxy, the pharmaceutical group their grandfather founded, in a $4.6 billion deal. But their latest move looks less shrewd. In a surprise U-turn, Fortis India has decided to acquire a Singapore-based sister firm – currently owned by the brothers themselves. The market is unimpressed. Shares in Fortis have fallen over 12 percent since the deal was announced last month.

There are three reasons for investors to be jittery. One is that there is an obvious difference of interest between the brothers and minority shareholders. Malvinder and Shivinder Singh own 100 percent of the target, Fortis Healthcare International, and 80 percent of the buyer. That means they will effectively cut their exposure to the acquired group by a fifth – while releasing $665 million of cash for themselves. The brothers haven’t said what they plan to do with that extra liquidity.

True, the price of $665 million, backed by an independent valuation, looks fair. The implied enterprise value of 13 times next year’s forecast EDITDA is below similar transactions in Asia that went for closer to 20 times. But that merely increases the worry that the brothers know something other investors don’t.

Secondly, it’s not entirely clear these companies belong together. Fortis has declined to put a number on the synergies. There may be some cost savings in procurement and back office operations, or some revenue gains if patients are more drawn to an international brand. But the drop in share price shows that investors don’t place great value on those.

Finally, there is the strategic reversal. Fortis previously said it would focus on investing at home, and hasn’t explained the change of tack. The Indian operation has EDITDA margins of 12.8 percent, higher than the 11 percent margins of the business being acquired. India’s growth in healthcare is likely to outpace the mature markets like Australia and Hong Kong that come with the Singaporean sister company. Overall, minority shareholders would probably have got a better deal if the cash had been spent at home.


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