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    Will IHH Healthcare's acquisition of Fortis nurse it out of ICU?

    Synopsis

    With its own mixed track record in India, the coup can easily turn into a winner’s curse for IHH.

    IHH
    To be fair, Leng and his core team have hit the ground running, flying to India on Sunday itself. A 100-day plan is already in place as IHH goes through a three-step transaction to consummate the deal.
    IHH Healthcare Berhad, Asia’s largest healthcare provider, was always the trump card. First, for Malvinder Singh. Then, for the institutional shareholders who took charge of his hospital chain after he ceased to be its promoter. In early 2017, exasperated at the pace of diligence by TPG and General Atlantic during their ‘3-month exclusivity period,’ Singh wanted IHH to step in and be the strategic counterweight. Happy to oblige, the Malaysians were tantalisingly close to stitching it up but pulled the plug just days before signing on the dotted line, worried about the implications of the legal battle between Daiichi Sankyo and the Singh brothers – Malvinder and Shivinder.

    Nine months later, they were back at the negotiating table this April, after efforts to bag Naresh Trehan’s Medanta came a cropper. By then, several hedge funds and FIIs who had taken large bets, wanted them to stir the pot again, unhappy with TPG-Manipal Health Enterprises’ offer.

    The next three months were nothing short of a potboiler, unprecedented in any Indian corporate takeover – founder promoters unseated; shareholder rebellion; the board replaced; allegations of fraud and fiscal mismanagement, rival bids and counter offers being accepted only to be rejected later. Finally, last Friday, IHH was shortlisted to take control of Fortis, its $1.1-billion offer trumping that of rival TPG-Manipal. For a company whose next lease of growth pivots on India and Greater China, India’s second-largest platform is arguably a crown jewel.

    RIGHT DOSAGE
    “The acquisition demonstrates our commitment to invest considerable resources to expand and consolidate our footprint in India,” said Dato’ Mohammed Azlan bin Hashim, non-executive chairman of IHH. First, the scale. It helps IHH bulk up its India presence amid a private healthcare boom, with a network of 34 hospitals and 4,685-bed capacity. More strategically, it complements IHH’s existing footprint here and marks its presence in the north, the largest market by population, where it didn’t have any presence till date.

    India will vault to become the thirdlargest market in terms of revenues for IHH, with its share increasing from 6% to 24% of IHH revenues. After all, IHH’s core markets of Singapore and Malaysia have plateaued, rendering heft in new gateways critical. Not to mention India’s abundant clinical talent and cost arbritrage.
    Fortis-A1

    Analysts at CIMB in Kuala Lumpur call it another “milestone,” with synergies to be unlocked over 18-24 months’ transition. Analyst Ngoh Yi Sin says, “Fortis is attractive to IHH for its extensive presence, integrated offerings and alignment with IHH’s brownfield strategy. Healthcare services in India also provide significant opportunities, given the large, but underinsured, population, improving GDP per capita and underserved needs.” Fortis’ diagnostics subsidiary SRL also offers an opportunity to a global lab franchise.

    “After Malaysia, Singapore and Turkey, India is our fourth home market,” argues Tan See Leng, the Singaporean chief executive, IHH. “Fortis will significantly increase our reach across the Indian subcontinent, complementing existing capabilities in high-value quaternary care. This is a natural progression of our plans.” Post-acquisition, IHH will be second-largest player in Indian healthcare.

    “IHH is a great platform in a challenging environment,” says Abhay Soi, chairman, Radiant Life Care, a competing bidder for Fortis who opted out in the last lap. “Hope IHH will get its arm around and make something out of it, as it needs lot of work.”

    LIFE AFTER SINGH PARIVAR
    However, Fortis can easily turn into a minefield with entrenched interest groups and power centres, feels insiders. “Prepare to find some rubies once you really go in,” quips a long-term Fortis investor who owns more than 1%.

    Radha Soami Satsang Trust still looms large and its current head, Gurinder Singh Dhillon, maternal uncle of the Singh brothers, has significant business interests. Dhillon son’s Gurpreet is CEO of the Singapore Trust and his mother Shabhnam and companies controlled by her had significant shareholding in group entities of the family, such as Religare and Fortis. Independent directors of the trust are or have been satsangis themselves.

    Sheikh Abdullah of Hong Leong Investment Bank says, “Gestation period for this acquisition remains opaque in the backdrop of regulator investigations into alleged fraudulent transactions at Fortis.”

    Add the slugfest on brand rights and outstanding dues of Rs 450 crore, and it’s been eating into the performance. Margins have slipped to 13.6% last year from 14.7%; occupancy dropped to 65% in the March quarter, a 5 percentage point fall from the previous three months. Profitability sagged even further, with a `932-crore net loss in Q4 on massive provisions.

    In his defence, Leng argues that he has done his diligence well for the past 16 months. “The road ahead for us can be long but given the discipline and prudence we exercised in evaluating this asset, we have taken a calculated risk.”

    Investigations into the money trail and qualified audit reports with additional caveats and disclaimers have been taken into full consideration. “We are quite comfortable with what we have found so far,” says Anchal Agarwal, assistant vice-president, strategic planning, IHH Healthcare. “We had revised our bids downwards after they came out.”

    MEDICAL NEGLIGENCE?
    What actually makes people nervous is IHH’s chequered Indian track record thus far. Despite its 15 years of Indian operations and over $500 million in investments, IHH, backed by Malaysian sovereign wealth fund Khazannah, has just managed to break even in 2007. Hamstrung by greenfield delays, recalcitrant joint venture partners and messy litigation, they have shown limited operational successes since completion of acquisitions or partnerships.

    India accounted for 6% of its global revenues in 2017 and just 1% of global Ebitda.

    “They have consistently chosen the wrong partners. You can make a mistake once, when you are new. But this is a pattern," quips a CEO of a rival chain, on condition of anonymity. “They have always used India as a beachhead and lacked proper local management bandwidth to manoeuvre its unique challenges.”

    The 450-bed Gleneagles Khubchandani Hospital in Mumbai was to start in 2012 but is not yet functional. “We got stuck with regulatory approvals but we have the permissions now and are confident to start operations in the next nine months,” claims Prakash Khubchandani, MD of the eponymous group. “Our JV is alive and IHH has been very aggressive on India.”
    Fortis-A2

    Yet, most CEOs ET spoke to remain circumspect. “In a 50:50 JV, the money was largely brought in and entire debt guaranteed by by Parkway. Isn’t that odd?” asks a Delhi-based healthcare entrepreneur on condition of anonymity. “All the local partner did was get the land and that too got into trouble.” IHH has taken a $25-million impairment in 2016 for the project.

    Such greenfield risks forced a midcourse strategy correction, with IHH looking to buy and consolidate. Even then, there were hurdles.

    Their JV partner in Hyderabad moved the National Company Law Tribunal and various other forums for oppression of minority shareholder rights in early 2017, just two years after IHH bought 51% in the 750-bed super specialty Continental Hospital. Its founders, led by Thota Gurunath Reddy, accused IHH of manipulating board minutes and creating an artificial funding crisis to act against company interests, using it as a vehicle to enrich their associate companies. IHH eventually increased its stake and replaced its top management.

    Reddy refused to speak on the matter since it is sub judice.

    Even the Rs 1,284-crore acquisition of 73.4% in Global Hospitals had a mixed outcome, feel analysts, though IHH boasts a 25% jump in revenues.

    Company insiders, however, say most operating and financial projections have not been met – largely on account of natural calamities adversely impacting the flagship Chennai hospitals. “Expensive state-of-the-art equipment was damaged and the facilities had to be shut. That was a body blow,” recalls a senior company executive, who did not wish to be identified. “But IHH bought into the unrealistic projections sold to them in the first place.”

    The Mumbai set-up, perceived by many as the original cash cow, has seen only a tenth of the promised sum being put in, say its officials. There is also speculation that leading doctors, some even copromoters, are leaving the Chennai unit.

    “The entire edifice of Global was based on doctors like Mohammed Rela, a former dean of King’s College, UK. If they leave, the set-up will crumble,” adds a promoter of a regional chain.

    Rela remained unavailable for comments. “Our partnership (with IHH) is going well. I am not interested in discussing any further,” K Ravindranath, founder, Global Hospitals, told ET curtly.
    Fortis-A3

    The aggressive acquisition spree also irked IHH’s original partner in India, the Prathap Reddy family, promoters of Apollo Hospitals, India’s largest hospital chain. They saw a breach of trust in the overlap. IHH wanted to acquire more from Apollo but the Reddys resisted. “It’s a classic problem between two strategics whose aspirations were mismatched. IHH did not want to be a passive investor,” says a former investor. “They even explored a merger but it also didn’t go anywhere.”

    Earlier this year, IHH, once the secondlargest shareholder in Apollo, cashed out with a windfall of Rs 1,900 core from a 10-year-old investment. However, the duo still runs Apollo Gleneagles in Kolkata and a PET-CT Centre in Hyderabad.

    “Don’t judge us by single assets but as a group,” argues Leng. “Given our aspirations, we will have critics and supporters… Even today, we have a wonderful working relationship with Apollo. We exited because we are operators of hospitals and not financial investors.”

    INTENSIVE CARE
    To be fair, Leng and his core team have hit the ground running, flying to India on Sunday itself. A 100-day plan is already in place as IHH goes through a three-step transaction to consummate the deal. The board will be revamped, the management reinvigorated with key additions to the core team and morale resuscitated.

    “The immediate task for us is to go in, secure and stabilise ship,” with a first booster dose of Rs 4,000 crore, Leng explains. “We will also be leveraging on IHH’s superior credit profile to optimise debt funding cost. We are confident we can save 2-4% in terms of current financing cost of Fortis,” adds Low Soon Teck, group chief financial officer, IHH and Parkway Pantai.

    As the offspring of two venerable hospital operators — Singapore’s Parkway and Malaysia’s Pantai — IHH is no upstart in turning around distressed assets.

    In Turkey, Acibadem, the local operator in which it bought 60% controlling interest, has seen revenues and Ebitda both jump around 20% on a CAGR from 2012-17.

    Last year, Gleneagles Hong Kong Hospital opened doors to 500 beds in one shot instead of phases. It is Hong Kong’s first private hospital after 20 years

    In Singapore, IHH built Mount Elizabeth Novena, the first private hospital to be built from the ground up in more than 30 years, and achieved Ebitda breakeven within a short 12 months. The company – operating 49 hospitals and more than 10,000 beds globally – has also been rewarding shareholders with an average 12% return over the past five years.

    In fact, the fierce takeover fight for Parkway Singapore in 2010 – when Leng was its CEO-designate – had left Fortis and the Singhs in the cold and woken investors to South Asia and Asean’s possibilities for private healthcare profit. Leng wants to showcase the pedigree with Fortis as well.

    “They are mature and know their business well,” says Trehan, chairman, Medanta. “Besides, competition will spur other players to do well.”

    India has been work in progress, admits the IHH brass, but as Leng puts it, “We have been strengthening our brand and bench strength and have learnt from other groups’ mistakes.” Recently, Ajay Bakshi, former CEO of Manipal Hospitals, joined the team to head the India operations.

    AMBULANCE SPOTTING
    What’s worrying are the macro headwinds – price caps and heightened regulatory scrutiny – even for a long-term operator. With Ebitda margins shrinking to 12-14% and single-digit returns on equity, the entire industry is poised for a serious re-rating, though demand for healthcare services in India is set to explode. And for an operator that has largely been a high quality, high cost player, such controls can be against its basic DNA.

    “Our offer for Fortis reflected a comprehensive analysis of the risk and reward of the business,” says Ranjan Pai of Manipal, who also revised his bid downwards.

    “Running a hospital today is like running an airline in India. There is massive demand but you are the government’s favourite whipping boy,” laments one of the CEOs mentioned above. “You need 133 licences to run a single hospital. As an MNC, IHH could perhaps be better off opting for a stronger local promoter-partner to deal with these operating risks.”

    First, Daichi Sankyo was scalded by the Singh brothers. Then, our own Dilip Shanghvi. We wouldn’t want a burning train a third time round, would we?


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