IHH's journey to become one of the largest healthcare groups in the world

Dr Tan See Leng: Well, the last 10 years have been quite phenomenal for me and the organisation. We’ve been able to expand our footprint from what was the old Parkway Holdings. Today, we’re in [more than 10 countries], including Turkey, Singapore, Bulgaria, Macedonia and, of course, India, China and Brunei.

It has been a very intense, very strenuous climb in the last 10 years.

And growth-wise, are you able to quantify it?

Dr Tan: When we first started in 2009, I think we had three hospitals in Singapore and 11 in Malaysia. Later on, Acibadem came along. We opened Novena and went on to bid for Hong Kong. Now, we have Fortis. We now have 84 hospitals. So, from 14 to 84.

But I’m not someone who focuses on just size — the number of beds or hospitals. I’m more comforted by the fact that we’ve been able to replicate our Malaysian and Singapore brand and translate it into many of these geographies.

How competitive is healthcare?

Dr Tan: It is an intense competition space that we operate in. I mean, it is a certain kind of need. The reality is that we all aspire to have good health. And the advances in medical technology also mean that as the average life span continues to improve, the number of patients will also continue to grow.

So, one of the barriers to entry would be that you need deep pockets?

Dr Tan: It’s not just deep pockets. A barrier to entry is that you need good doctors. You can throw capital, you can throw billions of dollars, but if you don’t have that ‘heart-ware’ and that software in terms of making sure that you create an ecosystem that can attract doctors to join, you will not be able to succeed.

We notice that Singapore contributes a lot to the group’s revenue even though it’s small in terms of hospitals and beds.

Dr Tan: We focus on very high-end healthcare there. In terms of the comprehensiveness of our facilities, we are truly a one-stop centre. Meaning that when you go into Parkway East, Mount Elizabeth Novena, Mount Elizabeth Orchard or Gleneagles, you don’t have to go anywhere else.

All the doctors will come to you, the equipment is there and we have well-equipped intensive care units, operating rooms, day surgical facilities and radiological investigation facilities, plus even radiation oncology.

Let’s say a lady wakes up in the morning and finds a lump in her breast. By 9am or 10am, she will be able to get an appointment to see a doctor. On the same afternoon, whatever that needs to be done — ultrasound, mammogram, even fine needle aspiration biopsy — will be done. And on the same day or the next, she’ll be in the doctor’s office and he will be able to give his diagnosis.

Is that why there is a premium [on charges] in Singapore?

Dr Tan: Yes, that is what we deliver. And we do the same now in Malaysia. The model we started in Singapore is now in Malaysia. We also see that in Hong Kong and Turkey. We are now bringing that to Fortis in India.

After Fortis, does India look exciting? What is your total investment to date?

Dr Tan: If we’re able to complete [the purchase of Fortis], we would end up with 56% to 57% of the company, which means a total investment cost of about US$1 billion [$1.35 billion]. Today, we have invested US$500 million to US$600 million in the 31.17% stake in Fortis.

The remaining US$400 million is in escrow in a bank in India, waiting for the Supreme Court’s decision. We are not that worried about the Supreme Court’s decision going either way.

If they say yes, we can carry on. Then, the money will be used for a mandatory general offer, and we will end up with another 26%. And if they say no, it’s also okay. The money will be returned to us.

The bottom line is that you need to increase your stake in Fortis.

Dr Tan: We don’t need to.

But you would like to?

Dr Tan: We would like to, but we don’t need to. Because today, with a 31.17% stake, we are already the single-largest shareholder of Fortis.

You sold out of Apollo Hospitals, and then you got Fortis...

Dr Tan: Apollo was a financial investment. When we got out, we had a 10.85% stake. But we’re no fund manager or investor. We don’t invest. We’re operators. Our structure, the way management has been, is that we roll up our sleeves and go in and operate the asset. We identify hidden gems, we take, clean and polish them until they shine so that they become crown jewels. That is what we do.

IHH’s financials are erratic. Is that common in the healthcare sector?

Dr Tan: The bulk of it is actually foreign exchange.

You’re hedging in Turkey, right?

Dr Tan: We have gone up to 90% [shareholding] now [in Acibadem]. And we will be capitalising the US$670 million foreign currency-denominated debt to bring the debt down to about US$400 million.

We have stopped expansionary capital expenditure in Turkey. We’re also looking for ways and means to rationalise some of the assets. We hope that in the medium term, we will be able to reduce the debt by another US$100 million to about US$300 over million. Then, it becomes manageable and you will not see fluctuations.

Of the US$300 over million, we plan to take half in Turkish lira, so the only exposure is less than US$200 million of foreign currency. So, these are the steps that we’re actively taking.

Whenever we talk about Singapore, we always look at Hong Kong. Do you replicate what you’re doing in Singapore there?

Dr Tan: We hope to. I think, in the long run, Hong Kong, as a market, should be at least on a par with Singapore, if not better. The key thing about Hong Kong is that if the government doesn’t give you land to build a private hospital, you have no chance.

How about China?

Dr Tan: China opened up its markets only in the last couple of decades. The healthcare industry always lags behind. When a country opens up, in the beginning, it is logistics, construction, property, then telecommunications and airlines, and then, usually, the banks. Healthcare comes in much later.

Only in the last 10 years have we seen a proliferation of private healthcare, [but then again] our [offerings] in China are high-end. So, in China, it is greenfield development, just like in Hong Kong. And incubation is long in greenfield development.

We’re in Hong Kong, which is part of the Greater Bay area; Shanghai, which is part of the Yangtze River delta; Chengdu, Sichuan, which is part of central China. In Chengdu, we will open in 2H2019 with 450 beds. But we will start with 100 beds. In Shanghai, we will open in 2H2020, with 500 beds, which will be phased in. Only in Hong Kong do we have to open [big]. So, if you look at these three, we’re on track.

What impact will this have on your bottom line?

Dr Tan: Given where we are, our bottom line will not be that impacted because of the earnings from Singapore, Malaysia and Turkey. In India, we’re beginning to see growth now. Very fast, you know, a 100-day plan. We’re already seeing an improvement in Ebitda [earnings before interest, taxes, depreciation and amortisation] at Fortis.

Do you see a lot of value in Fortis?

Dr Tan: Yes. When you do the maths, it is quite mind-boggling. We have plans, we’ve just crossed the 100-day plan, we’ve fulfilled all of the requirements we said we would. So now, we are entering the six-month plan. The other thing is rationalising some of the assets; for instance, they’ve got some minority JVs [joint ventures] in Mauritius, in Sri Lanka, and they have bought some land. We will rationalise some of these things.

When you look back, are there any highs and lows?

Dr Tan: It has been mostly highs. You need resilience and mental strength in this business. At times, when people think you shouldn’t be doing something, that’s where the opportunities lie.

There is synergy in Fortis acquisition, says Tan

When it first came to light that IHH Healthcare was looking to buy a 31.17% stake in Fortis Healthcare, 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 in 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 faced graft charges; an IJM Corp director was investigated as part of Satyam Computer Services’ fraud case; government-linked TH Heavy Engineering (formerly Ramunia Holdings) had issues with Oil and Natural Gas Corp; Mudajaya Group had a tough time over its 26% stake in RKM Powergen; and more recently, Scomi Engineering had problems with its monorail business there.

In fact, before Fortis, IHH had already had difficulties in India. In 2015, it acquired a controlling 51% stake in the 750-bed super speciality 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, saying that it was 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 — a 50:50 venture between Koncentric Investments and IHH’s Parkway Group Healthcare — 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

IHH bagged Fortis after beating out a number of big names, including Manipal Hospitals Enterprises 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, a unit of Fosun International; and Mumbai’s Radiant Lifecare, backed by buyout firm KKR & Co.

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 ($1.35 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 ($787.2 million).

IHH’s offer was 15% higher than Fortis’ share price of INR170 at the time. Fortis was trading at INR135.15 on April 8.

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 funds from the company.

IHH’s unit, Northern TK Venture, 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 a share. Similarly, Fortis Malar Hospitals, 62.71%-owned by Fortis, was slated to be made an offer, though 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 at 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 Hospitals.

What’s in Fortis?

So, why was IHH interested in Fortis, apart from its 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 [holdings],” Tan explains.

The integration Tan is referring to 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… 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.

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

Jose Barrock is a senior editor at The Edge Malaysia