For Asia’s biggest healthcare provider, IHH Healthcare Berhard, India has been a difficult market to crack. The recent decision by the Supreme Court to maintain a status quo with regard to a deal involving IHH's buyout of Fortis Healthcare, has only added to the Malaysian company's woes, while putting a question mark on the future of a once-thriving hospital chain.

The Supreme Court’s decision follows a contempt plea by Japanese drugmaker Daiichi-Sankyo against Fortis promoters, the Singh brothers and Indiabulls, alleging that the two had sold 1.2 million pledged shares of Fortis Healthcare held by Fortis Healthcare Holding, despite the court's order against it.

In its petition before the apex court, Daiichi-Sankyo has alleged that the Singh brothers and Indiabulls created fresh pledged shares of nearly 1.7 million out of the total 2.3 million shares that were left after the top court’s order. Of these, while Indiabulls had created encumbrances for 1.2 million shares, the rest had either been created by Singh brothers or other third parties.

This is not the first time that IHH Healthcare’s plans to buy Fortis have faced a stumbling block. The Malaysian healthcare provider had to pull out of a similar deal last year as well. Now, the possibility of a long-drawn legal battle between the former owner of Ranbaxy, Daiichi Sankyo, and the Singh brothers Malvinder and Shivinder, who had sold Ranbaxy to the Japanese company, seems to put IHH’s plans in jeopardy again.

IHH Healthcare had come back to the negotiating table this year, after its attempt to take over Naresh Trehan’s hospital Medanta, came a cropper. Although, they weren’t the only suitors for the distressed Fortis. Sunil Kant Munjal, chairman of the Hero group, with Anand C. Burman, chairman, Dabur India, and Bengaluru-based Manipal Health Enterprises, backed by U.S. private equity firm TPG Capital, were in the race as well.

For months corporate India witnessed a bruising battle, never seen in the history of hospital chain takeovers, among venture capitalists, hospital chain owners and private equity firms. The existing Fortis board was dismantled, a new one appointed, allegations of financial irregularities and mismanagement swirled around, and a shareholders rebellion took place. The new management was forced to appoint a law firm to look into all these issues.

Finally, on November 13, 2018, IHH Healthcare became the controlling shareholder by acquiring a 31.1% stake in the company. Fortis Healthcare also appointed four IHH Healthcare executives to its board. The board approved the allotment of over 230 million shares through preferential issue to Northern TK Venture, a wholly owned indirect subsidiary of IHH Healthcare, at ₹170 per share of ₹10 face value.

“The acquisition demonstrates our commitment to invest considerable resources to expand and consolidate our footprint in India,” IHH Healthcare’s managing director (MD) and chief executive (CEO) Tan See Leng, said at the first press conference after the acquisition of a private healthcare chain with a network of 34 hospitals and 4,685 beds. It would also provide the company with a foothold into North India, the largest market by population.

“The immediate task for us is to go in, secure and stabilise ship, with a first booster dose of ₹4,000 crore,” Leng had explained. “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.

The takeover also seemed to make eminent business sense for IHH. “Fortis is attractive to IHH for its extensive presence, integrated offerings and alignment with IHH’s brownfield strategy,” said an analyst. Healthcare services in India also provide significant opportunities because of the large size of the uninsured population and improving incomes.

But the Supreme Court’s order of December 14 has come as a major body blow. While the company has clarified that the court order does not impact the preferential allotment that was made to Northern TK Ventures by Fortis on, in accordance with applicable law, but it might impact its 26% open offer worth some ₹3,300 crore.  “We would like to clarify that Fortis Healthcare is not a party to the judicial proceedings in which the order has been passed,’’ IHH said in a statement to BSE.

It added that the ex-promoters are no longer a part of Fortis and the judicial proceedings were in matters solely related to them – specifically, in connection with alleged transfer of their shares to Indiabulls Housing Finance Limited, in respect of which contempt proceedings had been sought to be initiated and the transfer itself being sought to be set aside.

But caught in the cross-fire between the Singh brothers and Daiichi Sankyo, IHH may find it difficult to consolidate its hold on the hospital chain and also put its strategy in place. It would also delay its decision to pay-off the Fortis-owned SRL Diagnostics’ investors who want to exit the business.

For IHH, the SC judgment comes at a time when the company’s effort to merge or even get a bigger share of Apollo Hospitals has also failed, although it  cashed out with a windfall of ₹1,900 core from a 10-year-old investment in the hospital chain.

For IHH, Fortis presents an opportunity to make its mark in a country, where it has spend 15 years and $500 million. It will be interesting to see what it can do with the Fortis group, especially when the sector is facing headwinds like price caps and stringent regulatory scrutiny and Ebidta margins are falling.

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