Parkway’s stock price may hit Fortis hard

The battle for Parkway is getting increasingly competitive as the two players — Fortis Healthcare and Khazanah — struggle to out-bid each other. Khazanah, the Malaysian state fund which was expected to give a revised bid for Parkway Holdings against Fortis’ S$ 3.8 per share, has extended the offer period by another 18 days. If it fails to come up

with a revised offer within the stipulated period, Fortis along with RHC will need to raise around Rs 11,000 crore to fund the acquisition for the remaining 74.7% stake of Parkway. So, what does this imply for shareholders of Fortis Healthcare?

Parkway’s revenues for the year ended December 2009 touched approximately Rs 3,290 crore while it recorded a net profit of around Rs 400 crore. Against this, Fortis has revenues of Rs 927 crore and a net profit of Rs 71.57 crore for fiscal 2010. In case, the two entities get merged, it will lead to consolidated net sales of around Rs 4,217 crore — a significantly large entity in the healthcare segment.

Moreover, Parkway also holds around 12% stake in Apollo Hospitals — a strong rival of Fortis in the Indian market.

Fortis has an equity of close to Rs 1,600 crore. Depending on how the funding is structured for this acquisition, there is a possibility of significant equity dilution for Fortis. Assuming a debt-equity of 7:3, Fortis and RHC together will need an additional Rs 7,700 crore in debt and Rs 3,300 crore in equity. This may weigh down Fortis’ balance sheet heavily and depress earnings per share.

However, if Khazanah makes a revised bid for acquiring a 100% stake, Fortis will have to contemplate tendering its holdings in Parkway to Khazanah. This will allow Fortis to book profit of Rs 200-250 crore (depending on the offer given by Khazanah). However, given the criticality of acquiring Parkway, profit-booking seems to be a remote possibility.

Amid all these speculations, Parkway’s stock, which was trading at a price of S$3 and a P/E multiple of 27.5 before this acquisition race, is currently trading at S$3.88 and has a P/E multiple of around 35.4 against the Singapore healthcare industry average of 22.

While the rising stock price is good news for Parkway’s shareholders, it is definitely not so good for the Fortis’ shareholders.