This article first appeared in The Edge Financial Daily on July 16, 2018
KUALA LUMPUR: IHH Healthcare Bhd said it is confident in its move to expand its footprint in India, following the acceptance of its bid to acquire a controlling stake in Fortis Healthcare Ltd.
India, a market of 1.2 billion, has proved to be a rather challenging environment for corporate Malaysia to expand into due to opaque regulatory systems, as well as confusing bureaucracies.Several big names including tycoon T Ananda Krishnan and Axiata Group Bhd have had their fingers burnt after expanding into the subcontinent.
However, IHH managing director and chief executive officer Dr Tan See Leng said the group’s experiences in India have taught it several lessons on how to navigate the country’s business environment. He cited the legacy issues the group had to face with one of IHH’s greenfield projects in India. Having learnt from the experience, IHH is now looking more towards brownfield projects.
“We did run into some legacy issues with one incomplete greenfield project and hence, we learnt from that mistake. Instead of building more greenfield projects, we pivoted into a brownfield acquisition mode,” Tan told a media conference call last Friday.
Tan was likely referring to the Gleneagles Khubchandani Hospital in Mumbai, which was a 50:50 joint venture (JV) between Koncentric Investments Ltd and IHH’s Parkway Group Healthcare Pte Ltd.
The project, which was initially scheduled to start in June 2011, was postponed to November 2012, as construction works stalled due to disagreements between the JV partners. The delays led to an impairment charge of RM97.34 million for IHH in the financial year ended Dec 31, 2017 (FY17), according to its latest annual report, on its investment in Khubchandani Hospital up to its estimated recoverable amount.
“We are in a good estate as one could possibly be in. We will never be able to mitigate 100% of the risks as that is the nature of operations, particularly in the healthcare environment and macroeconomics of the business,” Tan said.
Besides the challenging regulatory and business environments in India, IHH also has to deal with legacy issues within Fortis, especially involving its former controlling shareholders, Malvinder and Shivinder Singh. Last month, an investigation into the cash-strapped hospital chain by law firm Luthra & Luthra concluded that the brothers are to blame for the mismanagement of Fortis’ finances.
It was alleged that a unit within Fortis had granted unsecured loans worth 4.45 billion Indian rupees to three companies affiliated with the brothers, without board approval. The brothers are in court facing charges that include siphoning money from financial services firm Religare Enterprises.
Tan said IHH is fully aware of what it is getting into after going through its due diligence, as it had identified and factored in the key risks involved. He added that the group is “cautiously optimistic” about its turnaround plans.
“Suffice to say, given what we know now, we are cautiously optimistic that our turnaround strategy over the next couple of quarters would not be too difficult. At the same time, we are fully cognisant of what we are going into,” said Tan.
IHH has a 100-day plan in place to turn around Fortis. Some of the more urgent items to be resolved are Fortis’ inability to acquire credit lines to cover overheads including rental cost of Singapore-listed Religare Health Trust (RHT), said Tan.
Fortis is a controlling shareholder of RHT with a 27.6% stake.
The group will also renegotiate some of Fortis’ credit lines as well as procurement costs, leveraging on IHH’s global procurement pricing arrangement with some of its vendors. “That’s a short summary of what we intend to do with the 100-day plan, which should provide some fairly good results in the near term,” Tan said.
IHH is acquiring a 31.1% stake in Fortis at 170 Indian rupees per share for a total consideration of 40 billion Indian rupees (about RM2.35 billion), through a preferential allotment and a mandatory open offer for up to 26% voting share capital of the company. Subsequently, IHH will make a mandatory open offer for up to 26% interest in Fortis Malar Hospitals Ltd as required under the Indian Takeover Code.
This is not the first time the shareholders of IHH and Fortis have got in touch, given the two healthcare group’s history. In 2010, Khazanah Nasional Bhd and Fortis locked horns in their bids to acquire Parkway Holdings Ltd. At that time, IHH Healthcare Bhd had yet to be formed and listed. Both Khazanah and Fortis were on an expansion path amid the booming healthcare market in the region.
As Parkway ran hospitals in Malaysia, Singapore, India and China, it was a suitable target for both Fortis and Khazanah at the time. Fortis acquired a 24% stake in Parkway for about US$3.56 per share from a private equity firm, TPG, earlier in March 2010 and had subsequently acquired more shares on the open market.
With at least a 24% stake in Parkway, Fortis had offered S$3.80 per share to acquire the remaining shares of the Singapore-based healthcare company in June 2010, only to be outdone by Khazanah’s offer of S$3.95 per share the following month. The offer price of S$3.95 apiece was higher than the market price at that time, giving the healthcare provider about 31 times of its 2010 earnings. The last time Parkway shares hit those levels was back in October 2007.
Fortis eventually gave in, accepted the offer and made a profit of S$116.7 million. After Khazanah took Parkway off the market in 2010 after paying S$3.5 billion, it took out the concession assets in Pantai Holdings Bhd and injected the remaining 60% into what is now called IHH. Last Friday, IHH closed up three sen or 0.5% at RM6, giving it a market capitalisation of RM49.47 billion.