India court ruling on Fortis deal may be a blessing in disguise for IHH

COULD investors of IHH Healthcare be caught in a rip tide of "emotional flooding" (an intense knee-jerk reaction fuelled by a sense of danger that results in an instinct to fight and run)?

The stock of Asia's largest private healthcare group that is listed on both the Malaysian and Singapore stock exchanges has bumped by some 7 and 3 per cent respectively since last Friday after news broke that on Dec 14, India's highest court ordered a "status quo" on its buyout of Fortis Healthcare, putting on hold a mandatory open offer for up to 26 per cent more of India's second largest hospital chain.

This hardly qualifies as bad news. Au contraire, it may even be a stroke of good luck for IHH.

For one, IHH already bagged a controlling stake of 31 per cent in Fortis last month after it coughed up RM2.35 billion (S$770 million) for a preferential allotment of Fortis shares.

The Malaysian-controlled hospital operator should be thanking its lucky stars that the court ruling that came about from a contempt plea by a Japanese drugmaker against Fortis' founders and ex-promoters, Singh brothers, had not come before the shares subscription in mid-November - now, that would have been a stone in the shoe for IHH's maiden foray into the booming North Indian region (it already has presence in south India).

With the majority stake, IHH already has operational control over Fortis and has four seats on its board. This means it can forge ahead with its plan to stabilise the ailing hospital group, restructure its debt, better the cash flow and ramp up operations; it has thus far pumped 4,000 crore rupees (S$768 million) into Fortis.

Given management's ability to exercise control, IHH is also now able to consolidate Fortis' accounts into its group numbers.

Lest one forgets, IHH expects to keep the listing status of Fortis. The open offer that now hangs in balance as a result of the court decision was triggered by IHH following the preferential allotment as per India's takeover code.

Assuming full take up of the open offer to public shareholders, the exercise could cost IHH a further RM2 billion. The Fortis offer will also trigger a mandatory open offer for 26 per cent of Malar Healthcare, a Fortis subsidiary (if the Fortis offer is fully taken up) - this exercise could cost around RM17 million.

Depending on the final outcome of India's court and if the open offers are stonewalled, cash-rich IHH could potentially enjoy a sweet savings bonus of some RM2.2 billion. After all, it already has majority stake and management control of Fortis.

A more sensible reaction to the latest news, however, is Fortis stock which has fared understandably poorly over this period and dipped over 10 per cent.

At the risk of laying the glass-half-full theory too thick, here too there is a win-win for IHH as the current market price at some 137 Indian rupees is way below the open offer price of 170 Indian rupees apiece, rendering the offer an expensive endeavour for IHH.

For that reason too, the biggest losers if the open offer is stayed are Fortis' public shareholders.

Over and above that, analysts are sanguine over the Fortis buyout on IHH's long-term prospects - notwithstanding the short-term pains considering Fortis' ailing state - which will ratchet up India's contribution to group revenue from 6 per cent to 24 per cent and the number of its operating hospitals to 83 from 43.

In short, while there are other worries over the IHH-Fortis deal (for example, how long it could take for the ailing Indian hospital to turn around), the latest ruling out of India's highest court ought not to be one of them.