Khazanah Nasional Bhd’s proposal to raise its stake in Singapore-listed Parkway Holdings Ltd is a preemptive strike against the other primary shareholder Fortis Healthcare Ltd, which is seeking to raise its stake as well, say sources.

Sources say that Fortis has been sending out feelers to other stakeholders, the majority of which are institutions, which prompted Khazanah to make a partial voluntary offer to bring its shareholding to 51%. In an exercise announced last Thursday, Khazanah offered to mop up 313 million shares in Parkway at S$3.78 each.

Khazanah presently holds 23.32% in Parkway while Fortis is the biggest shareholder with 25.27%. The other notable shareholders are the Bank of New York Mellon Corp (5.99%), Newton Investment Management Ltd (5.98%), Franklin Resources Inc (5.98%) and Kek Seng (M) Bhd (2.98%).

“Fortis has been approaching the other shareholders to see how they would feel about selling their stake. This is why Khazanah is imputing such a high premium to its offer price as it is trying to dissuade the Indian players from competing. Khazanah has identified Parkway as its cornerstone company to venture into the healthcare industry. So they don’t want to lose control of it,” the source says.

Fortis bought its initial 23.9% stake for S$959 million, or S$3.56 per share, from TPG Capital earlier this year. It has since accumulated more shares on the open market bringing its present shareholding to about 25%.

Fortis is the fastest growing healthcare and medical services provider in India, with over 6,000 beds in a network of 46 hospitals throughout the subcontinent. It also has interests in healthcare education via its training colleges. The group is controlled by billionaire brothers Malvinder and Shivinder Mohan Singh.

Although the Fortis buy-in to Parkway was previously seen as beneficial, it is not clear whether the relationship with Fortis will remain as cordial now that Khazanah has stepped up its plans to take up a bigger stake.

The buy-in from Fortis was largely heralded as the impetus for value growth for Parkway, enabling it to speed up its penetration into India. Moreover, Fortis’ resources, such as its Indian training colleges and foreign pool of nurses, were expected to enhance operating efficiency and expand Parkway’s margins.

When Fortis made the initial investment in Parkway, Malvinder, the chairman of the group, said the company was interested in expanding its footprint across the region. Whether the Khazanah stake purchase will stunt the expansion of that footprint remains to be seen.
Parkway is one of the more attractive healthcare groups in the region, and one of the biggest in terms of market cap. Outside of China, it is the the largest by market cap with a capitalisation of S$3.4 billion (US$2.44 billion).

Other major healthcare service providers in the region include Bangkok Dusit Medical Services plc with a market cap of US$970 million, followed by Apollo Hospitals Enterprise in India (US$973 million), Fortis (US$989 million) and Bumrungrad International Hospital,  also in Bangkok (US$688 million).

From a PER standpoint, Parkway is by no means the cheapest of the group, although with a trailing PER of 27.6 times, it is not the most expensive either. Cheaper than the Indian companies but more expensive than the Thais, Parkway remains an attractive counter because of its regional exposure. In terms of its financials, Parkway resumed its profit growth in its FY2009 after a hiccup in 2008 owing to exceptional items and writedowns of financial instruments which cut into its bottom line.

Parkway is at present expanding in Singapore through the construction of a new hospital in Novena. Seen as an important destination for medical tourism, the new hospital is expected to further jolt Parkway’s growth story.

“Parkway Novena Hospital, which offers only single-bed rooms, will raise the bar for private healthcare when it opens its doors in 2QCY2012. The sale of half the medical suites take care of the entire construction cost, while demand for the remaining half should remain firm,” an analyst from Kim Eng Research Singapore  says in a note.

At the same time, Parkway is also gaining traction in India, where it has a 50% stake in Apollo Gleneagles Hospital Ltd and in various other medical facilities. It also has a presence in China, Brunei and the Middle East through various joint ventures. It has a network of 16 hospitals with 3,400 beds across six countries.

On the offer itself, Khazanah’s price of S$3.78 made via its indirect wholly-owned subsidiary Integrated Healthcare Holdings Ltd, represents a 25.2% premium to the last traded price of S$3.02. Should the proposal go through, Khazanah will be on the hook for S$1.18 billion (RM2.77 billion). As Khazanah’s is only a partial offer, it means that shareholders have received offers for approximately 36.4% of their interest in Parkway. According to an announcement, shareholders are entitled to offer to sell more shares.

In tandem with the possibility of Khazanah getting more shares than the additional 27.66%, the SWF reserves the right to change the offer from a partial one to a general offer.

The offer is subject to Khazanah receiving acceptance of at least 313 million shares that will effectively give it a 51% stake in Parkway. Another condition is that at least 50% of the remaining shareholders in Parkway  (excluding Khazanah and its related parties) approve the partial offer.

The entire process is expected to take another 1 1/2 months, by which time sources do not discount the possibility of Fortis making a counter offer.

Khazanah says in a statement that it has no plans to change the management team of Parkway should the offer be accepted, and intends to maintain the listing status of Parkway on the Singapore Exchange.

Ahmad Shahizam Mohd Shariff, a director of Integrated Healthcare, says in a press statement that the company will “consolidate Khazanah’s existing stakes in Parkway, Pantai, Apollo and International Medical Universtiy (IMU) to become Asia’s premium regional healthcare platform”.

Apart from its stake in Parkway, Khazanah also holds 60% equity interest in Pantai Irama Ventures Sdn Bhd, which is the holding company of the Pantai group of hospitals and medical services here. Parkway holds the remaining 40% of Pantai Irama. Khazanah also owns a 12.2% stake in Apollo Hospitals Enterprise Ltd in India, and a 67.5% stake in IMU Health Sdn Bhd, which owns the International Medical University in Kuala Lumpur.

Khazanah has reportedly said in the past that it was interested in increasing its stake in Parkway in order to better control the operations of the Pantai group of hospitals, the biggest hospital chain in Malaysia, and this acquisition will let it do so.

Parkway has seen a number of strategic shareholders come and go. Substantial stakes changed hands several times even before the Fortis-TPG deal. At one point, the Tan and Ang families of Malaysia’s Petaling Garden, DBS Land and Symphony Capital Partners Asia were substantial shareholders.

Symphony Capital purchased a 19.6% stake in 1999 after the Asian financial crisis from the Tan and Ang families for S$292 million. This stake was subsequently sold to Khazanah in 2006 for S$581 million. The Tan and Ang families then bought a 16.7% stake from Capitaland in 2001, which was then sold to TPG in 2006. This stake would finally end up in the hands of Fortis after the deal last March.

The Tan and Ang families are said to still own minor stakes in Parkway and their roles will be crucial in the coming months.

This article appeared in Corporate  page, The Edge Malaysia, Issue 808, May 31-Jun 6, 2010