One learning is the need to improve corporate governance standards of India’s largely promoter-driven hospitals sector
The competition for a slice of India’s healthcare pie continues with a fierce bidding war for Kolkata-based AMRI Hospitals. The latest buzz is that Max Health has added Rs 900 crore to Manipal Health Enterprises’ (MHE) bid, making it a total bid of Rs 2700 crore.
This counteroffer has reportedly forced MHE to take legal action, moving the Delhi High Court on November 29, to block AMRI’s promoters, the Emami Group, from backing out of the purchase agreement signed between MHE and Emami way back in June this year.
Will this become another prolonged legal tangle, like the IHH Healthcare-Fortis saga? In November 2018, Malaysia’s IHH Healthcare purchased a 31.17 per cent stake in Fortis Healthcare. The Malaysian group invested about Rs 4,000 crores of fresh capital to grow its presence in India through the Fortis network.
However, IHH Healthcare’s mandatory open offer (MTO) of December 2018, to acquire an additional 26.1 per cent stake in Fortis, is in limbo since the past four years. A Supreme Court order took cognisance of Japanese pharma company Daichii Sankyo’s allegation that the IHH Healthcare-Fortis deal violates the former promoters’ undertaking that they would not sell shares in any of their companies. The SC order relates to the pending settlement of a Rs 3,500-crore arbitration award to the Japanese company, alleging Malvinder Singh and Shivinder Singh, from the original promoter family of Ranbaxy Laboratories and Fortis Healthcare, withheld crucial information when they sold Ranbaxy Laboratories to Daichii Sankyo in 2008.
The current management of Fortis and IHH Healthcare has always tried to ring fence themselves from the actions of the former promoters and management, pointing out that IHH Healthcare’s purchase of controlling stakes on November 13, 2018 was three months after Fortis shareholders passed the resolution to remove Singh brothers as promoters on August 13, 2018.
When asked on a concall on November 9, what would it take for IHH Healthcare to walk away from Fortis, (the way Daichii Sankyo cut its loses when it sold Ranbaxy to Sun Pharma in 2015), Dr Kelvin Loh, MD and CEO, IHH Healthcare reiterated that “Fortis is IHH’s main platform in India.” He also indicated that plans to re-brand Fortis to the Parkway brand would also happen in due course of time.
In a press statement that followed on November 11, Dr Loh addressed investor sentiment saying, “We certainly understand the frustration Fortis investors have felt over the past four years around the uncertainty of the IHH open offer.” He ended his statement, “…hopeful for a positive outcome so that we can explore more avenues to work with Fortis to accelerate its growth plans,…”
Whether IHH Healthcare is an ‘innocent bystander’ suffering ‘collateral damage’ due to the alleged misdeeds of the past promoters/management, the fact remains that it stands to gain immensely by sticking to its guns and waiting till the courts give the green signal for the MTO. As per the terms of the MTO framed in 2018, IHH Healthcare would pay Rs 170 per share, which is substantially lower than the current share price of Fortis Healthcare. (Rs 288.55 on December 2, 2022). On the November 9 concall, Dr Loh indicated that there was no requirement to change this offer price.
The rise in the Fortis stock price reflects the steady improvement in its operating margins over the past four years, thanks to the fresh capital from IHH Healthcare and guided by the current management. Fortis’ contribution to IHH Healthcare’s revenues is also on the rise. While the Q32022 results of IHH Healthcare Berhad, posted on November 30, showed a disappointing over 50 per cent drop in net income, in part due to a high base in Q32021 and forex losses, the numbers from India were encouraging. In terms of revenue and EBITDA at the IHH Healthcare Group level, India operations contributed 22 per cent and 18 per cent respectively. India operations clocked a 6 per cent revenue growth and one per cent de-growth in EBITDA compared to other markets.
Fortis is thus once again an attractive takeover target. Rumours that other hospital groups and strategic investors have tried to muscle in have also done the rounds from time to time.
The interest is a reflection of the opportunities in India’s healthcare sector, seen as a recession proof sector. Patients and their caregivers may postpone but cannot totally avoid hospital stay, especially if they are part of India’s growing demographic prone to lifestyle conditions, which need prolonged and repeated care.
So how will history view the IHH-Fortis saga? One learning is the need to improve corporate governance standards of India’s largely promoter-driven hospitals sector. There is also the need to improve ease of doing business and speed up the legal process to give more confidence to overseas investors. While investors vie for a slice of India’s hospital pie, which is only set to increase with an ageing demographic, well on the way to becoming the diabetes/NCD capital of the world, how can policy makers balance patient needs with corporate interests?
Meanwhile on the public health front, pockets of India are seeing outbreaks of measles among children who missed their vaccinations during the COVID pandemic. Hopefully, these outbreaks will result in more budgetary allocation to immunisation in the upcoming budget. Healthcare experts are in fact pushing for increased allocation for adult vaccinations as well. The recent cyber attack at AIIMS Delhi is the latest warning that there are many weak links in our public health infrastructure, which can be easily exploited.
As we near the end of 2022 and plan for 2023, we hope some of these learnings convert into action in the year ahead.
(Updated on December 7, 2022)
VIVEKA ROYCHOWDHURY Editor
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