The Interloper.

     Elliott. Perhaps no other name strikes as much fear into the heart of an underperforming or poorly managed company. For years, Paul Singer and his band of merry men have circled and attacked companies in play, companies in the midst of management overhauls and companies that have performed well below their full potential to take on the bidders and managements and enforce a higher offer price or change in management. All of Elliott’s targets seem to have had a common characteristic – a stock price well below where it should have been.

     Elliott’s approach is opportunistic and far from friendly, to say the very least. It takes sizeable stakes in companies that are vulnerable and valued by the market at far lower levels than they deserve, and then launches public campaigns and attacks against the company managements, goading them to improve financial performance, sell underperforming divisions or non-core assets, buy back shares, pay more dividends and in extreme cases, overhaul the entire management or board of the company. While that method may seem like the modus operandi of any activist investor in the modern era, Elliott is known to specifically target companies in two specific major transition phases and over the years, Elliott has created nothing but trouble, while laughing all the way to the bank.

     Delistings. When a company itself knows that the markets would never give it the valuation it deserves or if its future profits are expected to be far higher than the market knows or recognizes, the greatest sign of confidence of the management in the company’s future is to go in for a delisting. Intuitively, Elliott has been known to pile into a company’s stock months before a delisting and then when the event is announced, Elliott forces the company to offer a higher tender price by lapping up more shares and encouraging other institutional and public shareholders not to tender their shares until the company gives in to its demand for a higher tender price. With the company desperate to delist, it usually folds and increases its delisting tender price to squeeze out the minority shareholders.

     Acquisitions. By far Elliott’s most tried and tested route, an imminent deal is the time at which the target is ripe for the picking and that’s when Elliott moves in for the kill. When a deal is announced or sometimes, even before an imminent announcement, Elliott launches an attack on the target and scoops up large chunks of its shares, sometimes even to the extent of becoming its largest public shareholder, giving it a significant voice in any public tender offer, in the case of a bid from an acquirer. Elliott then holds out for a higher offer price to stall the deal or better yet, it launches a public campaign highlighting how the acquirer is undervaluing and buying the target at cents on the dollar, with the ultimate objective of derailing any plans that the acquirer had of buying the target at the originally quoted price.

     Over the years, Elliott has taken on the biggest of names in the corporate world and to its credit, it has succeeded more often than not. Be it ThyssenKrupp-Tata Steel or Samsung or Cognizant or Akzo Nobel or even Warren Buffett’s bid for Oncor Energy, Elliott has always stepped up to the plate and hit a home run, either forcing a management change or squeezing the acquirer or delisting entity for a higher offer price. Of course, Elliott has misfired on quite a few occasions as well; a recent example would be Fortum’s acquisition of E.ON’s 47% stake in Uniper, where funds such as Elliott and Knight Vinke, another well-known activist troublemaker, raked up Uniper shares, hoping to thwart Fortum’s €22/share bid and hold out for a higher offer price. Fortum however simply refused to enter into dialogue with the funds and closed the Uniper acquisition. A stung Elliott later tried to exact revenge by demanding a special audit of the management, asserting that it had side stepped regulations in closing the acquisition, as far as the deal’s Russian antitrust approvals were concerned.

     From an investment banking point of view, any transaction involving Elliott usually turns out to be a nightmare to work on, with panic-stricken boards demanding regular updates on its every move and deck after deck of strategies to thwart unwanted bids and mount defence shields. While Elliott has taken on companies around the world, as far as India goes, Elliott managed to plonk itself into Patni Computers before its acquisition and delisting by iGate. It also accumulated a small stake in Wipro. In a rare example of siding with a company, Elliott also collaborated with AstraZeneca India, in a highly controversial delisting (which you can read all about here) that saw Elliott pick up a stake in the company and subsequently jettison it when SEBI smelt a rat and arrived on the scene. It’s safe to say that Elliott courts controversy wherever it goes and its latest Indian sojourn has turned out to be no different.

     Fortis Healthcare. By far no other entity has been in the limelight in the recent past for all the wrong reasons the way Fortis has. After selling Ranbaxy to Daiichi Sankyo in 2008, in a perfectly-timed exit and deal valued at over 4 billion Dollars, just before the company hit an iceberg (you can read all about the Ranbaxy – Daiichi saga here), Malvinder and Shivinder Singh seemingly had a warchest to expand Fortis. Over the course of the next few years, Fortis went on a debt binge, even as it acquired hospitals in India (Wockhardt’s chain of facilities) and South-East Asia. It even tussled with Malaysian healthcare giant IHH Healthcare Berhad in a losing effort to acquire Singapore’s Parkway Hospital, even while IHH was rumoured to be in talks to pick up a stake in Fortis itself. While the acquisitions did give Fortis size and scale, they did little to improve its bottomline and only put further pressure on a stretched balance sheet.

     While Fortis’ debt at one point in time was as high as over Rs. 8000 crores, even while the company was losing money, it went on to sell several facilities to reduce debt, even as peers such as Apollo Hospitals and Max Healthcare, owned by the Singhs’ uncle Analjit Singh, outpaced it. All along, Fortis was linked with its parent, the Religare Group and a complex web of group companies based in Singapore, often giving rise to allegations of funds being diverted to promoter companies. On operational parameters, while Fortis was on par with its peers, it was the only healthcare company that continued to report a string of losses. While the company did announce plans to bring in a foreign investor, hive off its SRL Diagnostics arm and further pare down debt, little fructified. On several occasions, it was also rumoured that the Singhs were planning to exit a murky Fortis, a la Ranbaxy, even as the biggest crisis erupted.

     After selling Ranbaxy to Sun Pharma, a vengeful Daiichi Sankyo dragged the Singhs to court, which then ordered them to pay close to Rs. 3,500 crores in damages to Daiichi for selling Ranbaxy without disclosing the material facts that led to the crisis at the pharma major. In India, when companies run into trouble, their promoters often react in unique ways. While a few righteous individuals actually sell assets and pay off their debt, some have their elder brothers pull strings with the banks and government to buy their companies. Others leave the country well in advance to take up British citizenship.  Yet others flee the country bag and baggage, buy an English estate from Lewis Hamilton, hole up and proceed to criticize the government and the banks for making them lightning rods of public anger and poster boys of bank default. Some promoters have wound up in hotel rooms in New York and Hong Kong, even while others have taken up sugar farming on the island nation of St. Kitts, which incidentally and conveniently doesn’t have an extradition treaty with India. Fortis, as always, continues to be in a league of its own, with Shivinder Singh leaving the company in 2015 and joining the Radha Soami Satsang Beas to pursue spirituality and eventually attain sainthood by leading the sect.

     Fortis, however, was by no means holy as far as its affairs were concerned and slowly but surely, the banks began to tighten the noose. In a swift move, the entire pledged promoter shareholding was invoked and overnight, Axis Bank and Yes Bank found themselves to be the largest shareholders in the company, with the Singh brothers losing control of the company that they had run into the ground. With both banks themselves facing several headwinds such as rising NPAs, sketchy disclosures and rumours of a hostile takeover, they were in no position to run a beleaguered hospital chain and Fortis had been officially put into play.

     In early 2018, even as several bidders were studying Fortis, Manipal Healthcare (backed by TPG Capital) was the first to strike, announcing a merger, with plans to demerge the diagnostics business and list it independently. The following week, rival bids flew in from IHH, Fosun International, Radiant Healthcare (backed by KKR), and a consortium of the Munjals and Burmans. After all, Fortis more or less represents one of those once-in-a-lifetime assets put on the block; an opportunity to acquire a pan Indian albeit mismanaged hospital chain and a chance to gain an immediate presence in India’s rapidly growing healthcare market, where an organic expansion strategy might take decades to yield results. Of course, while the due diligence seemed to confirm what had been whispers of fraud and mismanagement all along, it failed to deter the bidders. Even as Fortis’ auditor Deloitte delayed the results and cited non-disclosure of several material facts, Fortis had diverted over Rs. 500 crores of cash to promoter entities. The company was flat lining as far as its cash levels were concerned, with talks of the company possibly running out of cash before a new promoter stepped in and of course, no one really knew what else was hidden in the black box. While the saintly Shivinder claimed innocence, Malvinder asserted that all decisions at Fortis had been taken jointly, even as the Fortis board that was filled with their cronies was ejected and a new temporary board put in place to see the acquisition through.

     While successive rounds of bidding weeded out potential investors one by one, it all came down to Manipal Healthcare and Fortis’ arch nemesis, IHH. Fortis’ new board went on to approve the Rs. 4,000 crore IHH bid for a potential 57% stake (c. 31% via a preferential allotment and an open offer for 26%) which was higher but also presented a simpler acquisition structure, comprising a subscription to fresh Fortis shares, a preferential allotment at Rs. 170/share and a future open offer to public shareholders, as against Manipal’s plans of an offer at Rs. 160/share, which involved a merger of the 2 companies. All this while, with no promoter in charge of Fortis, opportunistic investors such as East Bridge Capital, Jupiter Asset Management, Rakesh Jhunjhunwala and Radhakishan Damani had picked up chunks of Fortis shares, knowing fully well that a better managed Fortis with a strategic investor at the helm would be worth far more than the market’s current perception of the company. And featuring in that list of investors is a certain Elliott.

     While Fortis continues to be on life support, IHH’s winning bid should see the Malaysian healthcare chain infuse funds into Fortis over the next few weeks, even as the preferential allotment and open offer follow in succession. And while the open offer, which has to be made at a price of at least Rs. 170/share, is said to be the exit route that Fortis’ PE investors and funds are seeking, it remains to be seen if that is indeed the final chapter in the storied and controversial Fortis acquisition.

     While Elliott's stake in Fortis isn't yet sizeable, as far as current disclosures show, it has been in discussions with Fortis’ creditors to buy up more pledged shares. Elliott has often been known to lap up shares in the closing stages of a bid to push the offer price higher. Moreover, IHH’s parent company Khazanah Nasional is owned by the Malaysian government, which is embroiled in the 1MDB corruption scandal, one that has shaken the country to its very roots and this has thrown open the possibility of an interesting twist in the tale, in the case of IHH having to infuse more funds into Fortis.

     With an open offer at a minimum of Rs. 170/share for Fortis on the horizon, Elliott or the other investors could hold out for a higher price, which would drive both the share price and the offer price higher. While it may have won Fortis for now, it remains to be seen how far IHH would stretch, especially given the amount of capital infusion and management savvy it would take to first comprehend what other surprises Fortis has hidden away, turn the company around, get it back on its feet and then make it hale and hearty once again. Especially while Elliott might just be biding its time, salivating and waiting for the perfect moment to strike.