Fortis In Divestment Mode Again, Sells Dental Business

The ever-changing structure of the Indian healthcare giant Fortis Healthcare will see yet another alteration, as the company plans to divest its holding in its dental business in Australia and New Zealand. As per a recent filing, its global subsidiary Fortis Healthcare International (FHI) will sell a 64% stake in Dental Corporation Holding (DC) to UK-based Bupa for a consideration of AUD 270 (Rs 1551 crore). This transaction is expected to be completed by March 2013.

The company had acquired 33% stake in DC in 2010 for an amount of Rs 450 crore. Later, it bought further stake in the latter to become a majority stakeholder. At the time of the acquisition, DC had a total of 140 dental practices in Australia and New Zealand, which it increased to 190, as per a press release by Fortis.

However, Fortis has said that this business did not perform in keeping with its expectations. The press release also said that DC’s business model remained restricted to the two countries despite Fortis’ exploration efforts.

We, at Dalal Street Investment Journal, had carried a detailed analysis of Fortis Healthcare in our magazine in October this year. Our call to investors was to exit the counter, as the scrip did not seem to be very attractive due to its expensive acquisitions as well as the high debt–to-equity ratio.

The management now expects to consolidate its business after it has raised funds through a recent IPO in Singapore as well as the DC divestment. After these developments, the scrip has moved up about 12% mainly on the news of the company raising more funds. It seems that investors have given a thumbs-up to the news of the DC asset sale.

We, however, are of opinion that the acquisitions made by the company were very expensive in the first place. One can see that it has regularly been acquiring assets and then selling off some of them. In 2008, the promoters sold pharma giant Ranbaxy to Japanese company Daiichi Sankyo, in what was one of the biggest transactions in the domestic pharma sector. Fortis also acquired a diagnostic unit SRL promoted by its owners. In 2011, its promoters acquired its international subsidiary FHI, which was listed this year. DC is a part of FHI, and its promoters have again gone ahead with selling its operating assets acquired earlier. This does not speak well for the company, as the strategies of growth have clearly failed.

Due to its acquisitions, FHI has been amassing a massive debt burden, which had amounted over Rs 8000 crore by September 2012. The listing of Religare Trust in Singapore has yielded about Rs 2280 crore, which company has said would be used to reduce its debt. Likewise, the DC asset sale would also be used to reduce debt, following which the company expects its debt-to-equity ratio to come down to 0.6x.

The DC business added about 29% to its topline and 38% to the EBITDA. With the divestment, one may expect sizeable impact on its bottomline. The EPS will also come down due to the IPO, and hence its share price may see high volatility going ahead. Recently, the company’s board has approved a resolution to raise more funds, and one has to wait and see if it goes in for another asset sale.

The promoters hold 81.48% stake in the company, and this will need to brought down to 75% as per SEBI guidelines. We may see some developments on that front too soon. It should also be noted that a large chunk of the promoters’ shares are pledged. In addition, the company has not declared a dividend despite being in profit for the past 4 years.

All in all, we reiterate our call to avoid this scrip.