Going by the moves and counter-moves, the battle for the Singapore-based hospital chain Parkway Holdings seems no less exciting than a studied game of chess, said to have its origin in this part of the world. While the Malvinder and Shivinder Singh-promoted Fortis Healthcare seemed to be making progress with a 25%-plus stake in Parkway, it would now seem that Fortis has been all but ?checkmated? by the Malaysian government?s investment arm, Khazanah.
The Singhs have been looking to invest the Rs 10,000 crore that they made by selling their stake in Ranbaxy to Japan?s Daiichi Sankyo. Even as they exited pharmaceuticals, they were zeroing in on healthcare. Malvinder believes that to excel in any area, one has to be the leader at home. And so Fortis, which reported revenues of Rs 630.5 crore in 2008-09, snapped up ten hospitals of Wockhardt Hospitals in August 2009 for Rs 909 crore. However, it still remains the second-largest hospital services provider in the country with a capacity of 6,700 beds, behind Apollo Hospitals.
Then they discovered Parkway, the largest upscale hospital chain in Asia, with a network in South East Asia and exposure to the Middle East, Europe and China. In March this year, Fortis picked up a 23.9% stake in Parkway, from the US-based private equity firm TPG Capital for S$959 million (Rs 3,100 crore). It subsequently increased its stake to 25.3%, buying shares in the open market. It made another smart move by roping in the Government of Singapore Investment Corporation (GSIC), which bought 6.6% in Fortis for Rs 380 crore.
However, Fortis seems to have been unaware that Khazanah, which had a good rapport with TPG, was harbouring ambitions to become Asia?s leading healthcare player. Khazanah reportedly felt betrayed by its former ally TPG and was alarmed by the intrusion of Fortis. What emboldened Khazanah?s march towards Parkway was the presence of Fortis?s rival Apollo in its camp. After taking Apollo into confidence, Khazanah declared war in late May, announcing an open offer to up its stake to 51.5%, from the over 23% that it already had, with a proposed investment of $835 million. It was Khazanah and Apollo versus Fortis and GSIC.
The price of S$3.78 a share offered was at a hefty 25% premium to Parkway?s prevailing share price and 6% above what Fortis had paid. The offer has stumped Fortis, leaving it with three options. It could cash out and walk away with a cool profit of over Rs 200 crore by selling out to Khazanah. Or it could fight Khazanah by launching a counter-offer, which analysts say, needs to be at a premium of around 8 to 10% over Khazanah?s price. Another option is, it could stay put as a minority shareholder and keep fighting.
If Fortis decides to go ahead with a counter-offer, it would need to shell out in excess of $2.3 billion for a full open offer. That?s because the take-over laws in Singapore do not permit partial offer to parties who have bought shares in the last six months. Indeed, that?s something Khazanah would have kept in mind while making its offer. For sure, a counter-offer would not only stretch Fortis? balance sheet, it would also make the acquisition expensive, valuing the healthcare firm in excess of $2.9 billion, on annual revenues of less than $700 million and net profits of under $90 million.
Probably, Fortis has discovered a fourth option. Keeping its cards close to its chest, it announced plans last week to raise Rs 2,750 crore and increased the company?s borrowing limit to Rs 6,000 crore, fuelling speculation that a counter-offer is on its way. Already the share price of Parkway rose beyond S$3.8 last Thursday, above the price that Khazanah has offered. Perhaps that’s what Fortis wants; if Parkway?s shares continue to trade at levels above Khazanah?s offer price, shareholders would choose to sell shares in the open market, ruining the Malaysian fund?s plan. How the share price will move over the next four weeks or so, the period for which an offer must be kept open after the offer document is posted, needs to be watched. Shareholders in Parkway would also be eagerly watching to see whether the Singhs use their cache of Rs 10,000 crore to make a counter-offer.
For Khazanah, which made its formal offer on Thursday, it?s a win-win situation. It could go ahead with its ambitions in Asia?s healthcare sector, if Parkway investors warm up to its offer. If Fortis launches a tempting counter-offer, it could choose to exit with a healthy profit from its Parkway investment, which according to Khazanah?s own estimates, cost it around Singapore $3.4 a share.
For the Singh brothers, walking away from their dream, after having crossed the significant milestone of becoming Asia?s largest hospital chain and the world?s fourth largest, would be indeed disappointing. But it would bring important learning for the brothers, the elder of whom is only in his late thirties. And of course, this game on the corporate chessboard of the Asian healthcare market would serve as an interesting case study for many business schools.