This article first appeared in The Edge Malaysia Weekly as 'Issues at Fortis explained' (pages 68 and 69), on April 8, 2019 - April 14, 2019.

WHEN it first came to light that IHH Healthcare Bhd was looking to buy a 31.17% stake in Fortis Healthcare Ltd, a market watcher commented, “They think they can walk on water.” He was referring to IHH and its parent Khazanah Nasional Bhd’s aggressive expansion plan and their seeming lack of fear at going for such an asset without an Indian partner.

There were issues at Fortis but they had largely to do with its former founders and controlling shareholders Malvinder and Shivinder Singh.

Nevertheless, concerns about IHH’s venture into India were understandable. A number of Malaysians who had ventured into the country were already in trouble — business tycoon T Ananda Krishnan’s Maxis Bhd faced graft charges; an IJM Corp Bhd director was investigated as part of Satyam Computer Services’ fraud case; government-linked TH Heavy Engineering Bhd (formerly Ramunia Holdings Bhd) had issues with Oil and Natural Gas Corp of India; Mudajaya Group Bhd had a tough time over its 26% stake in R.K.M Powergen Pte Ltd; and more recently, Scomi Engineering Bhd had problems with its monorail business there.

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In fact, before Fortis, IHH had already had difficulties in India.

In 2015, it acquired a controlling 51% stake in the 750-bed super specialty hospital, Continental Hospitals, for about RM166.73 million. Less than two years later, the founders of the Hyderabad-based operation opposed a rights issue proposed by IHH to raise funds, terming it as forcing the minority shareholders to buy shares, violating the shareholders’ agreement, and further diluting shareholdings, and petitioned the National Company Law Tribunal.

It is not clear how the issue ended but IHH’s FY2017 annual report showed that the group had a 53.13% stake in Continental Hospitals.

IHH’s plan for a hospital in Mumbai ran into snags as well. As at June 2011, work on the construction of Gleneagles Khubchandani in Mumbai — an equal partnership between Koncentric Investments Ltd and IHH’s Parkway Group Healthcare Pte Ltd — was on schedule and the operation was slated to begin in November 2012. However, there were problems.

In its FY2016 annual report, IHH stated: “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.”

In its FY2017 annual report, the group stated that there were no further developments with regard to Gleneagles Khubchandani in 2017. Also, Khubchandani Hospitals Pvt Ltd was listed as dormant.

The Fortis acquisition

Be that as it may, IHH Healthcare managing director and CEO Dr Tan See Leng believes the investment in Fortis is likely to bear fruit.

“[The problems at Fortis have] nothing to do with IHH. Fortis itself is a transformational acquisition. The bulk of what we have invested goes into the company. And at no point was IHH named or was a party to the problems,” he says.

IHH’s offer was injected directly into Fortis through a preferential allotment of shares. All in, the group’s investment in Fortis could be as high as US$1 billion or RM4 billion, if it does end up taking up another 26% in the latter. Thus far, the 31.17% stake in Fortis has cost the group RM2.38 billion.

IHH’s offer was 15% higher than Fortis’ share price of INR170 at the time. Last Friday, Fortis was trading at INR136.90.

Cash-strapped Fortis came up for sale after brothers Malvinder and Shivinder Singh had to give up their shareholdings as a result of debts and allegations of impropriety — siphoning out funds from the company.

IHH’s unit, Northern TK Venture Pte Ltd, which had acquired the initial 31.17% stake in Fortis, was required to make a mandatory open offer for up to 26% of Fortis at INR170 per share. Similarly, Fortis Malar was slated to be made an offer but the quantum was to be decided later.

In the light of the open offers, an amount of RM1.97 billion was deposited in an escrow account.

On Dec 14 last year, the Indian Supreme Court ordered IHH’s acquisition of Fortis to be maintained as status quo with regard to the sale of a controlling stake. IHH was thus unable to proceed with its open offer, which would have given it as much as 56% of Fortis, or take over Fortis Malar Healthcare Ltd.

What’s in Fortis?

IHH bagged Fortis after beating a number of big names, including Manipal Hospital Enterprises Pvt Ltd in partnership with TPG Capital; Sunjil Munjal of Hero Enterprises in a joint bid with the Burman family of Dabur; China’s Fosun Health Holdings Ltd, an arm of Fosun International Ltd; and Mumbai’s Radiant Lifecare backed by buyout firm KKR.

So, what was Fortis’ attraction to IHH, apart from being India’s second-largest hospital chain?

“In Fortis, we see a tremendous opportunity to synergise our operations and integrate. We see the unlocking of value from the synergy. That’s why we would like to increase our percentage,” Tan explains.

The integration Tan is talking about involves Fortis and IHH migrating to a common financial reporting system, which will enable the group to better manage its debts and accounts payable, among others, and centralise its treasury function, which will save a lot in finance costs.

Fortis also saves from being inducted into IHH’s global procurement platform. “So, whether you are buying MRIs, CT scans, big-ticket items, cardiovascular services, monitoring your patients in intensive care, your operational beds, it’s all one price … so the savings are significant,” Tan says.

A check on Bloomberg reveals that in its financial year ended March 31, 2018, Fortis suffered a net loss of RM653.7 million on revenue of RM2.91 billion.

So, will Tan and IHH be able to turn things around at Fortis and make good in India, an underserved healthcare market?

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