Fortis-IHH healthcare case: Why is the trouble and what next? 

Fortis Healthcare's several strategic decisions and expansion plans may face delays as the Supreme Court (SC) has extended the stay on the sale of Fortis shares to Malaysia-based IHH Healthcare. Also, the apex court on Thursday awarded six months jail term to brothers Malvinder Singh and Shivinder Singh, the former promoters of Fortis Healthcare Ltd. Despite Fortis being well positioned in terms of finances, health industry analysts hold that the company’s near future plans, which have already suffered delays due to Covid, might have to be put on hold.  
 
What is the legal trouble? 
 
Fortis Healthcare is amidst a legal grind for the last 4 years. On 13 November 2018, Fortis Healthcare Ltd issued 23.53 crore equity shares through preferential allotment to Malaysia-based IHH Healthcare Berhad at Rs 170 per share. IHH infused approximately Rs 4,000 crore of primary capital into the company and became the controlling shareholder with around 31.1% stake.
 
Following this, the mandatory open offer for acquiring up to 26% of the expanded capital from the existing shareholders of Fortis at Rs 170 per share for a consideration of up to Rs 3,300 crore was to be completed in due course. Depending on the shares tendered by the shareholders of Fortis, IHH would have had between 31.1% to 57.1% stake in the expanded capital.
 
A year before, on 15 November 2017, Fortis Healthcare Ltd’s board had approved the acquisition of Singapore-based RHT Health Trust (RHT) for an enterprise value of around Rs 4,650 crore. The company had said that Fortis and RHT had inked a pact proposing the acquisition of all the securities of RHT’s entities in India holding, clinical entities, and businesses via the purchase of securities for an enterprise value of around Rs4,650 crore.
 
In 2018, Japanese firm Daiichi Sankyo which bought Ranbaxy from Fortis healthcare in 2008 (that was later acquired by Sun Pharmaceuticals for $3.2 billion), moved the SC accusing the Singh brothers of diverting funds through various shell companies to avoid the payments, which was in violation of the court orders. 
 
The Supreme Court in January 2019 sought a response from Fortis Healthcare Ltd (FHL) on the plea by Daiichi Sankyo that sought to restrain Fortis from transferring Rs 4,000 crore to RHT Health Trust that it has received from Malaysia’s IHH Healthcare Berhad.
 
It alleged that the Singh brothers and Indiabulls had together pledged 1.7 million shares of Fortis Healthcare held by Fortis Healthcare Holding, which was against the apex court’s order. Daiichi had also challenged the Fortis-IHH deal aiming to recover the Rs 3,600 crore arbitration award it had won in a Singapore tribunal against the Singh brothers. Fortis and IHH signed their deal in August 2018. Later, following the Daiichi challenge, in December 2018, the SC stayed the IIH open offer.
 
What next?  
 
The legal battle that started in 2018 is still continuing. “During these four years, the company undertook a comprehensive strategic review and prioritized key areas that drive revenues and operational performance under the new management and new promoter.  With this added uncertainty management’s expansion and strategic plans would take a back seat. The recent development could hamper their finance costs and hamper their brownfield expansion plan for their hospital business,” said Hemanshu Parmar, Research Analyst, HDFC Securities.
 
For the Financial Year 2021-22, Fortis Healthcare reported consolidated revenue from operations of Rs 5, 718 crore compared to Rs 4,030 crore reported for FY 2020-21 reflecting a growth of 42%. Revenue from the hospital business grew 36% to reach Rs 4,264 crore while gross revenues from the hospital chain’s diagnostic business housed in SRL grew 55% to reach Rs 1605 crore over the corresponding year.
 
Although the hospital business is well positioned and has demonstrated healthy operational efficiency with decent occupancy levels, analysts state that ongoing litigations and negative publicity may impact the near-term prospects of the company. 
 
Fortis Healthcare according to its annual report 2022, registered its highest ever EBITDA of Rs 1000+ crore in FY 2021-22. With the pandemic abating, the company speedily moved to augment its efforts on key growth levers of the business viz. clinical talent hiring, expanding medical programmes, and initiating brownfield bed expansion plans, says the annual report of Fortis.
 
Fortis earlier said that it plans to add approximately 225 beds in FY 22-23 through brownfield expansion, with a significant ramp-up planned in select facilities. The majority of the new beds will be added to the facilities in the company’s key geographic clusters which are Delhi, NCR, Maharashtra, Bengaluru, and Kolkata. In a longer-term plan, Fortis also wanted to add approximately 1500 beds over the next 3-5 years in the cluster regions considering them as cost and revenue drivers.
 
 “Company’s plan to add 1500 beds over next 4 years mainly in their existing clusters (brownfield expansion) might get off-track at least in the near-medium term. Also, the diagnostic business (SRL) is expected to see a moderation in profitability due to aggressive competitive intensity in the space. The topline growth which was projected earlier would be trimmed. Deciding upon the future plans for SRL would be also delayed,” said Parmar.
 
Will Fortis maintain investors' interest? 
 
The SC has now directed the High Court to consider execution proceedings of the Fortis-IHH deal. It has also appointed a forensic auditor to examine the transactions involved in the deal. This will further delay what was already a long-drawn case on the open offer. Pharma analysts hold that this outcome belied the expectation of an early resolution of the matter. Even after almost 4 years of this pending open offer matter, the company seems to have made no progress. 

The shares of Fortis Healthcare declined nearly 17 per cent in Thursday’s afternoon trade after the SC announced a jail term of six months for Malvinder Singh and Shivinder Singh in the Daiichi-Fortis case. The scrip traded 16.69 per cent down at Rs 259.25 at around 1 pm (IST). On the other hand, the benchmark BSE Sensex traded 0.77 per cent down at 58998 at around the same time.
 
“Ongoing cases indeed frustrate investors at large. The company is not able to capitalize on IHH’s international experience as their interests are not truly aligned until the open offer resolution is passed in their favour. Now till the forensic auditor’s appointment and submission of observations (if any) by forensic auditors, Delhi high court would not give its verdict. If the other party is aggrieved, then the matter would again go to Supreme Court. Such uncertainty on timelines would make existing shareholders restless; despite their sound operational and financial performance,” Parmar said.
 
Fortis Healthcare said that it is seeking legal advice regarding its next course of action. “We understand that the proceedings before the Hon’ble Supreme Court have concluded with certain directions and the suo-motu contempt has been disposed off. We will go by the directions of the Hon’ble Supreme Court and will be seeking legal advice regarding our future course of action,” the company said in a statement.
 
“We remain committed to our core purpose of patient care and will continue to focus on our strategic and operational objectives to further strengthen and expand our healthcare network. We will keep all our stakeholders informed, as required,” the hospital chain said.