SINGAPORE (July 23): In Singapore, IHH Healthcare is perhaps best known for its luxurious Mount Elizabeth Novena hospital. Here, patients are treated by physicians in the comfort of single-bedded rooms. The suites, which cost from $1,398 a day, can be as large as 180 sq m and boast premium features such as coffee machines, rain showers and temperature-controlled toilet seats.

The opulence is partly due to the hospital’s clientele. IHH’s Singapore brands Parkway and Gleneagles are associated with some of the region’s leading specialists, and their patients typically seek premium care. But IHH CEO Dr Tan See Leng says the hospital’s model is also a reflection of the changing nature of healthcare.

“We have moved away from building 500-bed facilities. Our sweet spot is now about 250 to 300 beds,” says Tan. “The reality is that with medical advances, with medical technology, the number of hospitalisations that require long-term stays is actually shrinking. Our average length of stay is actually shrinking. A lot of these moves are to stay in tune with the times and stay ahead of the curve.”

Last year, the average length of stay at Singapore hospitals operated by IHH was just 2.8 days. This compares to an average of 3.2 days in 2013. “These days, you only come in for the procedure,” Tan says. “Disruptive innovation is coming our way.”

Tan is not waiting around to be disrupted. As a hospital owner and operator with a network that spans Asia, the Middle East and Eastern Europe, IHH is actually moving towards preventive healthcare, and cutting the amount of time people spend in hospitals.

The group is building a patient database across its network of hospitals in Brunei, Bulgaria, China, Hong Kong, India, Macedonia, Malaysia, Singapore, Turkey and the United Arab Emirates. “Big data is the challenge for us and also the exciting opportunity for us to harness and ultimately come up with predictive analytics,” Tan says. “[We want] to tell you about your health and to pre-empt you into a good and healthy lifestyle, to reduce, ironically, your hospitalisation rate. That is what we would aspire to do in the next phase.”

Nearer-term growth

In the nearer term, however, IHH’s growth is likely to come from its continued expansion. On July 13, the company announced plans to acquire a majority stake in India’s Fortis Healthcare. The deal involves IHH subscribing for 235.3 million new Fortis shares at INR170 apiece. IHH will pay RM2.3 billion ($774.1 million) for these shares, which will give it a 31.1% equity interest. This transaction is subject to approval by the Competition Commission of India.

Separately, IHH will make an offer to Fortis’ shareholders for up to 26% of the latter’s expanded voting share capital. The offer price has not been set, but at INR170 per share, the offer will cost IHH a further RM2 billion. Assuming IHH completes the share subscription deal and receives full acceptances for its offer, it will control 57.1% of Fortis.

This would trigger an offer for Fortis Malar Hospitals, which is 62.4% owned by Fortis. IHH will offer to acquire up to 26% of Fortis Malar’s voting share capital at INR58 per share. The total consideration payable for full acceptance is RM17 million.

The deals will be funded by a combination of RM1.6 billion in external borrowings and RM2.7 billion in internally generated funds. IHH has a market capitalisation of $16.6 billion, based on its close on July 17 at $2.01 per share, so the deal is digestible. It will increase IHH’s gearing substantially, though. As at end-March, IHH’s net debt to earnings before interest, taxes, depreciation and amortisation for the last 12 months stood at 0.3 times. The deal will take its net debt-to-Ebitda ratio to between 1.4 and 2.1 times.

There is some execution risk to the acquisition. Fortis is currently loss-making. Also, a report by legal firm Luthra & Luthra, commissioned by the Fortis board in February, found lapses of control procedures and governance at the group. Fortis’ founders Malvinder Singh and his brother Shivinder have allegedly siphoned INR4.5 billion out of the group.

However, Tan is confident that IHH has the knowledge and experience to improve operational and financial performance at Fortis. “We know where the potholes are,” he says. IHH has pursued the acquisition of Fortis for over a year, and in the interim, Tan says the company has acquired a deeper knowledge of both Fortis and the Indian market. “I think we have a much better shot at making this thing work than a year ago or even six months ago.”

To illustrate, he gives the example of patient-to-staff ratios. Hospitals in developed markets tend to employ fewer workers for the same number of patients compared with players in emerging markets. This is because healthcare workers in countries such as Hong Kong and Singapore tend to be multi-skilled.

“In Hong Kong, they are very productive, very efficient. The nurses multitask at many levels. Singapore, probably we are about mid-way, together with Malaysia,” Tan says. “In emerging markets, such as India, you have a lot more staff. Each one will be compartmentalised into doing one thing.” One nurse might specialise in dressings, another in nursing, for instance.

“Our ability to level up their productivity and their training, particularly with regard to clinical governance, by making them take on more responsibilities, I think, is something we feel that we can do quite well. And we’re seeing traction on this in the facilities we have acquired,” Tan says.

By training healthcare workers at Fortis’ facilities to do more, IHH will be able to improve patient outcomes as well as operating margins. “The lesser you hand over, the higher the accuracy or precision,” says Tan, who is himself a doctor and used to run his own private practice. At IHH’s existing India hospitals, he says, the company has seen the positive effect of this upskilling move. Both hospitals also take on cases that are more complicated or of higher value —what the industry refers to as quaternary care.

IHH has a 100-day plan in place to turn Fortis around. Among the more urgent items to be resolved is Fortis’ inability to acquire credit lines to cover overheads. The share subscription deal will provide Fortis with some much-needed liquidity. IHH will renegotiate some of Fortis’ credit lines and procurement costs, leveraging IHH’s global procurement pricing arrangement with some of its vendors.

Analysts’ reactions positive

The Indian market has plenty of potential, according to Hong Leong Investment Bank analyst Sheikh Abdullah. “Considering that India’s public healthcare system is relatively underfunded [at about 1% of GDP] and insurance penetration rates are low [at less than 15% of the population], this move presents an extremely scalable opportunity of ready brownfield assets ripe for expansion in the most underserved healthcare infrastructure region in India,” says Sheikh in a July 16 update. He has a “hold” call and a price target of RM6.33.

Nomura analyst Raghavendra Divekar says the deal is “beneficial from a strategic and operational point of view”, as Fortis is one of the largest private hospital operators in India. The company has 34 hospitals and a total capacity of 4,685 beds. Its presence is largely in the north of the country. IHH, on the other hand, currently operates mostly in south and west India. “The acquisition of Fortis will make IHH the second-largest private hospital operator with a pan-India presence,” the analyst says.

Divekar has maintained his “buy” call and price target of RM7.10. “We like IHH Healthcare for its strong franchise and diversified healthcare operations in its four home markets of Singapore, Malaysia, Turkey and India. We see rising revenue intensity in all of its home markets, but especially in Singapore and Turkey, due to the company’s proactive investments in technologies such as robotic surgery, hybrid operating rooms and telemedicine. We believe these investments will help IHH’s hospitals differentiate themselves from peers and allow them to attract medical travellers and facilitate more complex and revenue-intensive surgeries,” he says in a July 13 note.

But Public Investment Bank analyst Nor Asilah Amran does not expect the acquisition to be earnings accretive in the near term. Depending on IHH’s final stake in Fortis, the acquisition would potentially dilute IHH’s earnings for FY2019 ending December by 1% to 4%, she says in a July 16 report. “Nevertheless, we are positive over the long-term prospects, as we see improvement in profitability of the hospitals given IHH’s expertise and track record as a global healthcare player,” she adds. She has a “neutral” call on the stock and a price target of RM6.57.

This story first appeared in The Edge Singapore (Issue 840, week of July 23). Click here to subscribe