IHH’s Fortis acquisition has hit a slight hiccup. The Supreme Court of India has put the sale of Fortis Healthcare to IHH on hold following a contempt plea filed by Daiichi Sankyo against Fortis' former promoters, the Singh brothers. IHH has completed the preferential allotment and still retains the 31.1% and 4 board seats. The supreme courts stay will essentially affect the open offer portion as minority shareholders will not be able to exercise the open offer until the courts lift the stay, thus delaying the completion of the deal which was scheduled to be completed by 4Q18. Maintain HOLD and SOP based TP of RM5.32.

NEWSBREAK

The bad news. According to various local and Indian newspapers, the Supreme Court of India has put the sale of Fortis Healthcare to IHH Healthcare on hold following a contempt plea filed by Daiichi Sankyo against Fortis' former promoters Malvinder and Shivinder Singh (Singh brothers). Daiichi Sankyo had moved the plea against the Singh brothers and Indiabulls alleging that the two had pledged 1.7 million shares of Fortis Healthcare held by Fortis Healthcare Holding, despite the apex court forbidding it. On February 15 this year, the Supreme Court had allowed banks and other financial institutions to sell shares of Fortis Healthcare pledged with them by the Singh brothers, on or before the August 31.

HLIB’s VIEW

What this means. The length of the status quo is unknown at this juncture as the court proceedings are still ongoing. We understand that the case is against the Singh brothers and not Fortis or IHH. IHH has completed the preferential allotment and still retains the 31.1% and 4 board seats after the preferential allotment. We understand that the Singh brothers held c.0.7% equity in Fortis Healthcare before the preferential allotment and have since been diluted further.

Not so bad news. Nonetheless, it is business as usual. The IHH team are still working on buying back the RHT assets, optimising the operations and finance costs and instilling better corporate governance into Fortis. The supreme courts stay will essentially affect the open offer portion as minority shareholders will not be able to exercise the open offer until the courts lift the stay, thus delaying the completion of the deal which was scheduled to be completed by 4Q18. To recap, the preferential allotment triggered a mandatory open offer to acquire up to 26% of the outstanding voting shares from the public. Upon successful completion IHH will become the single largest shareholder in Fortis with a 57.1% stake

Forecast. Unchanged.

Maintain HOLD, TP: RM5.32. Maintain our SOP based TP of RM5.32. We have always maintained that the acquisition is positive in the long run; however we qualify that the speed to completion and gestation period for this acquisition remains opaque amidst the backdrop of regulator investigations into alleged fraudulent transactions at Fortis which has manifested in this supreme court ruling at this juncture.

Source: Hong Leong Investment Bank Research - 17 Dec 2018