Battle for Singapore's Parkway

As my stream of consciousness is just in the process of being nurtured, well, for this blog atleast,I will be posting, for starters, my articles and columns. Below, a piece I worked on for the past weekend issue of The StarBizWeek

How did Khazanah and Fortis get to this point?

IF Khazanah Nasional Bhd could turn back the clock, it would – right up to March this year. US buyout firm TPG Capital, which was looking to exit Singapore-listed Parkway Holdings Ltd, had offered its 23.9% block to Khazanah. On hindsight wisdom, if the state investment arm had grabbed the chance, it could have saved itself a sweet S$400mil (RM935mil).
But time was no friend. Khazanah had three days to make up its mind on a deal worth over RM2bil.
“It wasn’t a meaningful offer. Surely, Khazanah couldn’t commit that much in just three days,” says a source.
The “time bomb” was dictated by India’s Fortis Healthcare Ltd, which had made an exploding offer to TPG. Fortis had offered to buy TPG’s stake at S$3.56 a piece or S$959mil but it was only good for five days. To safeguard its own interest, the private equity firm, whose typical investment horizon of five years had just about expired in Parkway, snatched the offer, pocketing rewarding gains.
No point dwelling in the might-have-been, they say.

My way or the highway?
Days after its entry into Parkway, the aggressive Singh brothers, one of India’s wealthiest billionaires who control the Fortis Group – India’s second largest hospital operator with a market value of US$1.1bil – wasted no time to mark their territory. They replaced four TPG nominee directors with their very own. Malvinder Mohan Singh or Malvi as he is widely known, flew right into the chairman’s seat and uprooted himself from his home base in New Delhi, India to Singapore. “It shows how serious the Singh brothers were about Parkway and their plans to build this Pan-Asian healthcare platform,” says a source close to them.
Khazanah, more specifically its nominee directors on the Parkway board, Datuk Azlan Hashim (Khazanah director), Ganen Sarvananthan (executive director of investments) and Ahmad Shahizam Shariff (director of Khazanah’s Integrated Healthcare Holdings Ltd (IHHL)) were in for a surprise. Realisation set in that unlike Khazanah’s cosy rapport with TPG, built over the years, there was simply no chemistry with Fortis. That, and this – Khazanah’s disproportionate representation in the board (2 versus Fortis’ 4) and Fortis’ assertion for control soured the ties, driving a wedge between them.
“Fortis was in business with Khazanah. It wanted Fortis to acknowledge that both of them have significant stakes so there’s really no justification that there ought to be disproportionate say in how the company should be run. But Fortis wanted control from the outset,” claimed a source. “They asked Khazanah to have faith and show support but what that essentially meant is they wanted it their way,” said the source.
The Singh brothers – both Malvi and Shivi (Shivinder) are reputed to be very hands on in the companies they own and would not hesitate to change the status quo in companies they’ve bought into by upsetting the management line-up.
But those who work closely with them, scoff at that notion.
“They’ve got trusted people whom they’ve put in the right place in all their businesses. So, they don’t meddle on a micro level. If the managers are able and are true blue professionals, why remove them? The Singhs set the vision for the group. So, I don’t think it’s fair to say they want control or to upset the management structure at Parkway,” said a source close to the brothers.
Incidentally, in April this year, the brothers, with a combined net worth of US$3bil, stepped down from the board of Religare Enterprise, a one-stop financial services firm they founded in 1984, which sparked rumours of a possible sale of the financial arm to focus on their pet project – healthcare. The news of a possible sale has since been denied.
In place, they hired their trusted lieutenants, Sunil Godhwani and Shachindra Nath as chairman and CEO respectively of Religare, both of whom played key roles in advising the Singhs on the fight for Parkway.

Disproportionate board
Since Khazanah’s entry into Parkway, it has had only two nominee directors on the board while TPG, the other substantial shareholder had four. For as long as both parties worked together, this was never quite a niggling point although it was one that Khazanah had hoped to address, but unfortunately, just not quickly enough. Fortis’ entry into Parkway turned this into a vulnerable spot and a major headache for the investment arm.
Khazanah’s repeated plea to nominate two more directors – its executive director of the investments division and country head for India Michael Fernandes and Tunku Mahmood Fawzy (he retired from his post as ED of investments in May this year) to Parkway’s board had come to naught. Having deferred the decision several times, it is believed that the board, led by Fortis, finally rejected the nominations. “They did this skillfully and artfully. They just wanted it their way,” said a source.
By April, the cracks had widened by the whole nine yards. At Parkway’s AGM on April 16, a Khazanah representative, Quek Pei Lynn, director of IHHL, stood up and read out from a piece of paper, publicly expressing the fund’s dissatisfaction over the board structure from the governance standpoint. “Khazanah wanted to make its stance well known that it disagreed with the board composition and that the governance issues needed to be examined,” said parties familiar with the matter.
In May, Malvinder came to Malaysia to meet with Khazanah’s boss Tan Sri Azman Mokhtar for the first time in the latter’s office at the Petronas Twin Towers.
The meeting produced no substantial outcome. Meant to break the ice between the two men sitting at the helm of their respective entities, there was only one thing that emerged clear from the session – there were divergent boundaries in their views, vision, culture and mindset.
Khazanah was left with three choices – exit, increase its stake incrementally to outflank Fortis or launch a takeover of Parkway. The first was not compelling given that healthcare was a strategic piece in its portfolio, while the second would have resulted in a dead lock.
Even so, a source close to Khazanah says the fund was “not sentimental or emotional about the asset”. “If Fortis wanted control, they could have done it. We asked them to make us an offer which should be made to others as well,” he said.
All that, of course, is now very much water under the bridge.

The poker game
On May 27, Malaysia’s wealth fund launched a partial takeover offer for Parkway shares at S$3.78 per share. “I think Fortis would have been surprised that Khazanah had not rolled over and played dead but instead made this big step,” says an observer.
Then, on July 1, merely seven days before the first closing date of Khazanah’s offer, Fortis retaliated with a counter bid for Parkway shares at S$3.80 per share, a paltry two sen premium over Khazanah’s bid. But here’s what made its offer more compelling - it involved a voluntary general offer, erasing the concerns of shareholders ending up with odd lots under Khazanah’s partial offer.
It seemed enough to swing the votes.
“Fortis didn’t have to pay anymore than they had to. Also, their potential capital outlay would have been three times that of Khazanah as it involved a GO,” says an observer.
At this point, many perceived that Fortis had the upper hand. But in reality, while Khazanah had an acceptable exit plan (it could accept Fortis’ offer and walk away with a decent gain; its average investment cost in Parkway stood at between S$3.20 and S$3.40 per share), for Fortis, Khazanah’s partial offer signalled an imperfect exit. “A partial offer is different from a GO. They were unequal offers. Fortis’ block was large, hence an inability to properly exit (through Khazanah’s offer) as they would have a chunk left behind,” said an observer.
The market was abuzz on Khazanah’s next move. But when the time was up, Khazanah decided to extend the deadline, leaving many, including Fortis, guessing on its game plan.
Those from the Fortis camp must have been peeved. “By extending the partial offer on the same terms, is Khazanah confusing shareholders on its intentions for Parkway? Isn’t this ambiguity in intent or lack of transparency not beneficial to Parkway’s shareholders and business? Could it possibly point to a lack of internal buy-in or an inability to line up financing?” said a source close to Fortis.
It was clear that Khazanah’s move to extend the deadline was largely tactical. “Buying time is always a good tactic. When time is on your side, why not use it to your advantage? Let the other party sweat it out and build its own assumptions. Your first price should never be the last price, in any bidding position. Khazanah also knew that S$3.80 may not be Fortis’ last price and could be good for one or two revisions,” said the source.
With that, as the final closing date of July 26 (Monday) started looming closer, the stakes were getting higher for all the players in this heated tussle for the control of Parkway and more so for Fortis. This proved enough to draw both warring factions back to the table.
Late Thursday (July 22), the advisers for both sides were locked in intense negotiations.
“The advisers were caught up in lengthy negotiations but the principles (of both firms) were holding the strings,” said the source.
Fortis was willing to exit but they wanted Khazanah to make a GO, which the latter was already planning to do after talks with other shareholders of Parkway. “The negotiations were not getting anywhere till the concept of GO was introduced,” said the source.
After going back and forth and countless text messages that proceeded well into the weekend, both parties, after months of dispute and distrust finally arrived at a mutual point. On Monday, Khazanah launched its GO at S$3.95 per Parkway share or S$3.5bil (RM8.2bil) with Fortis giving an irrevocable undertaking to accept the offer. The offer closes on Aug 16.
Still, many were surprised. “Khazanah must have been surprised that it landed on this so quickly. It was preparing for a long, hard slog,” says an observer.
The Singh brothers provide the explanation. “Every investment is done with a price point, rationale and game plan in mind. There will be a point beyond which we won’t pay. We were not keen to enter into a bidding war,” Malvinder said this in an interview with India’s The Economic Times over the week. “Parkway is a great asset but there is a value attached to it. We were a buyer to the point of S$3.80 a share, which was itself a stretched offer,” he added.
Shivinder Singh said: “At the end of the day, you have to take an economic call. You can’t take an emotional call on the assets you want to own.”
Game over? Pretty much – or so, it would seem.
Khazanah emerges victor in its bid to control Parkway while Fortis walks away, far from broken hearted, with a fat pay cheque and gain of S$117mil for a four-month long investment.

Singapore Inc’s stance
One main bridge that Khazanah had to cross in making the takeover offer for Parkway is whether or not Singapore Inc would accept a Malaysian wealth fund taking control of a strategic Singaporean asset.
Truth is, Parkway, which had started out a Singapore-centric, single-hospital organisation and morphed into a major provider of premium integrated healthcare service provider in the Asia with 16 hospitals and 60 clinics all over the region, for long has been largely foreign owned. As such, the “patriotic issues” are not expected to stir much rumblings among Singaporeans.
Of course, the reverse stands in stark contrast. In 2005, when Parkway acquired a 31% controlling stake in Malaysia’s Pantai Holdings Bhd, the issue of a national strategic asset with two lucrative medical concessions under the control of foreigners turned into a political hot potato in Malaysia.
To soothe the frayed nerves of critics, Khazanah swooped in mid-2006 and set up a special purpose vehicle Pantai Irama to acquire Parkway’s stake in Pantai, thereafter taking the latter private. Parkway ended up with 40% in Pantai Irama while the rest was controlled by Khazanah. In 2008, Khazanah acquired a 16% stake in Parkway, which it has since raised to the current 24%.

On the spotlight
What had taken many, especially governance hawks by surprise, is a pact that Fortis had signed with three key directors of Parkway which was revealed in an offer document to shareholders on Khazanah’s partial takeover bid (see chart).
Even this, shouldn’t have been a major shock, to Khazanah that is, as it is believed that two of the directors, Richard Seow and Dr Lim Cheok Peng, had a similar pact previously with TPG.
The agreement was to allow Fortis the right to direct how they should vote at board and shareholder meetings. For as long as TPG was on the other side of this agreement, there was no beef as both TPG and Khazanah were on the same page on how they planned to drive the healthcare group.
This all changed with Fortis’ entry. The make-up of Fortis and TPG is vastly different. Unlike TPG which is a private equity firm, Fortis is a leading operator of healthcare assets. It founded and is running a huge Indian healthcare group with 48 hospitals and 101 healthcare centres across Asia. So, given its operational expertise, it can be appreciated if it had its own views on how best to steer Parkway.
“Parkway will benefit from the support and commitment of a focused strategic investor and its management. Five years of control by financial investors (read: Khazanah) has delivered limited benefit to Parkway,” a source close to Fortis had said earlier on in the tussle.
Interestingly, while Seow and Lim had entered into the agreement with Fortis on March 11, the same day Fortis had acquired the stake in Parkway from TPG, the third director, Dr Tan See Leng, the company’s managing director had sealed the deal a little later on March 26.
But here’s the crunch – with Fortis’ exit from Parkway, are these directors in for a handsome pay day? The contract with Fortis grants each director “a right to participate in certain economic benefits” in the event Fortis sells over 10% of its shares in Parkway.
“This may not be applicable if the contract stipulates a certain time frame for the agreement before the rights kick in, which may not match the current circumstances,” says an observer.
Whatever it is, it surely has outraged governance watchers: “This is an anathema to basic governance.”

Moral of the story
Let this saga, which thankfully didn’t stretch for longer than four months, be a lesson for both Fortis and Khazanah.
For Khazanah, this incident drives home the point on the vulnerabilities of investing in a company with a scattered shareholding and the importance of putting in place a structure, be it in terms of board composition or others, to safeguard its interest.
The lesson for Fortis, and no doubt for Khazanah as well, this tussle marks a classic do and don’t to avoid pitfalls for investors venturing into new markets – Never ever assume the markets they are entering into are the same as their own.
Otherwise, there’s always the risk of value overriding values.