This article first appeared in The Edge Malaysia Weekly on April 23, 2018 - April 29, 2018

IHH Healthcare Bhd, the 40.61%-owned unit of Khazanah Nasional Bhd, seems to have stepped up efforts to buy out India’s Fortis Healthcare Ltd.

It has sent Fortis two non-binding letters in less than two weeks, and although it has yet to start talks with the Indian group, IHH has already upped its offer for it.

Last Thursday, IHH announced that it had raised its bid from INR160 (RM9.44) per share, or a total of RM4.9 billion, with the addition of a supplementary offer to infuse as much as INR4,000 crores (RM2.36 billion) into Fortis via a preferential share allotment at a price not exceeding INR160. Fortis closed at INR148.30 last Thursday.

IHH’s announcement to Bursa Malaysia said the infusion is intended to buy out the asset from Singapore-listed RHT Health Trust and to provide immediate liquidity for working capital and infrastructure upgrades.

Fortis’ board meets this week to consider all options that are submitted by April 25.

Others in the bidding war are Sunjil Munjal of Hero Enterprises jointly with the Burman family of Dabur, China’s Fosun Health Holdings Ltd — an arm of Fosun International Ltd — and Manipal Hospital Enterprises Pvt Ltd, which is backed by private equity firm TPG Capital.

All the bids are in the range of INR155 to INR156 per share with separate injections of funds. TPG and Manipal are valuing Fortis at INR155 per share in a merger of hospital businesses. Also waiting on the sidelines to submit a bid is Mumbai’s Radiant Lifecare, which is backed by buyout firm KKR, but no detail is available.

Considering the number of bidders (mostly foreign-based) and the big names involved, the takeover bid for Fortis is likely to have its merits. For IHH’s shareholders, taking control of India’s second largest healthcare group could be another feather in the company’s cap. But it is not easy to operate in India, judging by what other Malaysian companies have gone through in the market.

“India is very different from Singapore, Turkey or Malaysia … They (IHH) are looking (to buy) into Fortis without an Indian partner, which is very brave. Just ask any Malaysian company that has ventured into India about how difficult it is,” remarks a source familiar with the bid.

He cites business tycoon T Ananda Krishnan’s venture into Aircel Ltd, which went bust recently, and Mudajaya Group Bhd’s power generation aspirations in India as examples of plans gone awry.

Other companies that had problems working in the subcontinent include Scomi Engineering Bhd, which won a RM1.5 billion monorail contract in 2007 but faced delays as long as three years as a result of regulatory issues, and Ramunia Holdings Bhd (now TH Heavy Engineering Bhd), which, in 2008, was awarded a RM2.2 billion contract by India’s Oil and Natural Gas Corp Ltd and then blacklisted by ONGC after several issues.

The source comments that the investment risks are possibly overshadowed by the lure of controlling Fortis and becoming India’s second largest private hospital chain operator, if the deal materialises.

To IHH’s credit, its offer is non-binding and subject to a due diligence.

However, trouble is already brewing. Last week, minority shareholders who collectively control 12.04% of Fortis called for an extraordinary general meeting to remove some directors and appoint others as independent directors.

Could this be the start of shareholder activism at Fortis? Among the minority shareholders of Fortis is ace investor Rakesh Jhunjhunwala, also known as India’s Warren Buffett.

There are also issues with former controlling shareholders, namely brothers Malvinder and Shivinder Singh who collectively held more than 34% as at end-2017. Their stakes have shrunk to less than 1% as they have been unable to redeem pledged shares.

The brothers are now in court fighting charges that include siphoning money from financial services firm Religare Enterprises. They allegedly transferred some US$300 million from the financial services company to their privately held enterprises and are also alleged to have taken out US$78 million from Fortis.

The brothers have a checkered track record. In 2008, they sold their stake in pharmaceutical outfit Ranbaxy for US$2.4 billion to Japanese company Daiichi Sankyo. But shortly after the sale, US regulators slapped an import ban on Ranbaxy, citing the questionable quality of its drugs. Daiichi sued the brothers in 2013.

In March this year, the Indian High Court ordered the brothers to come up with US$550 million for Daiichi for allegedly withholding information regarding the US investigation into Ranbaxy.

The brothers have appealed to the Indian Supreme Court against the High Court verdict.

IHH’s parent company Khazanah has dealt with the two brothers before. In 2010, it acquired 76.1% of Parkway Holdings for US$3.3 billion or S$3.95 a share, pipping the brothers and Fortis, which had offered S$3.80 per share, for the stake.

Fortis held about 25% of Parkway and had come in aggressively, appointing as many as four board members to Khazanah’s two. Attempts to make the partnership more cordial failed, resulting in Khazanah forking out US$3.3 billion for Parkway.

IHH and Khazanah have a colourful track record in India too as they have had issues in at least two investments.

In 2015, IHH acquired a controlling 51% stake in the 750-bed super-specialist hospital, Continental Hospitals, for about RM166.73 million.

However, less than two years later, the founders of Hyderabad-based Continental Hospitals opposed a rights issue proposed by IHH to raise funds, terming it as forcing minority shareholders to buy shares, thus violating the terms of the shareholders’ agreement, and further diluting their shareholding. They then petitioned the National Company Law Tribunal.

It is not clear how the issue ended but in IHH’s 2016 annual report, Continental Hospitals Pvt Ltd is still a 51%-owned unit.

IHH’s plan for a hospital in Mumbai ran into problems as well.

Construction work on Gleneagles Khubchandani Hospital in Mumbai (an equally owned joint venture between Koncentric Investments Ltd and IHH’s Parkway Group Healthcare Pte Ltd) was on schedule as at June 2011 and operations were slated to begin in November 2012. However, things did not pan out as expected.

“The construction of Khubchandani Hospitals Pvt Ltd greenfield hospital in Mumbai stalled as a result of failed negotiations over disagreements with the joint-venture partner. As a result, the group recorded an impairment loss of RM97.34 million on its investment in Khubchandani Hospitals up to its estimated recoverable amount,” says IHH in its annual report.

Will IHH succeed in taking over Fortis and if it does, will the Indian group turn out to be an albatross around its neck? These are probably questions that IHH’s minority shareholders will have to ask themselves before they cast their vote at the EGM.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.