The Sunday Times FT - Harry J does it again

Corporate raider Harry Jayawardena once again proved that no government, president, regulator or individual stands in his way when he took over Apollo Hospitals last Thursday making another victim bite the dust.

Apollo by selling its shares to the Jayawardena-led Sri Lanka Insurance Corporation (SLIC) raised a few eyebrows because it gave up without a fight after resisting the offer with help from two governments – Sri Lanka and India.

This move also got stock market tongues wagging with allegations that the billionaire businessman did an ‘under the table’ deal buying the shares at Rs.32 each, instead of the mandatory offer's proposed Rs.28.

R. Navaratnam, Vice Chairman, Apollo Hospitals, who also sold out his 3.23 percent stake, which surprised the market, when asked whether it was an under the table deal, told The Sunday Times FT, “Not at all. I did not get any such money.”

He said he sold out because it was a ‘good time to do so’. “Apollo in my option is a specialist manager. When Apollo moved, I thought it was a good time to move out as well,” he said. He also said that it was a completely personal decision. “I brought Apollo into this country. When they wanted to sell out, I decided to do so as well and it was a personal decision,” the Colombo businessman who owns the Rio Cinema, said. He stressed that it was never a monetary issue to move out. He said the main point in taking this decision by Apollo India was that Property Development Limited’s (PDL) stand was not clear. “PDL’s stand did not come out in any agreement,” he said. But analysts said this statement was hollow because the government had assured that PDL will not sell out.

When asked whether Jayawardena threatened Apollo India with ‘dirt’ on the way the hospital was managed by them and allegedly siphoning off money to India, he brushed the allegations aside. “What nonsense is this? There were members in the board including PDL, SLIC, the lenders who were NDB Bank, Mr. Bob Kundanmal and me. How can Apollo siphon out money when there are representations like this on the board?” he asked.

When asked what happens to the management, he said that now it is upto the two parties concerned. “It is upto Mr. Jayawardena and Apollo Hospitals India,” he said. Board of Investment (BOI) Chairman Lakshman R Watawala, now in Singapore, told The Sunday Times FT by telephone that the BOI will be following the procedures. “We will do as we had initially planned and will study the entire scenario before we take any steps,” he said. The BOI in an earlier statement had threatened to withdraw all concessions if there is any change in the ownership, a statement which was widely criticised by the business community as the stockmarket clearly allows any investor to buy a majority stake in a company.

Damien Fernando, a director of SLIC who often acts as Jayawardene’s spokesman, was unavailable for comment. So was Jayawardene. However Fernando in a letter to the Colombo Stock Exchange on Friday said the SLIC hadn’t acted in concert with any one to acquire the shares. He said the total number of shares accepted under the offer amounts to 33.5 percent of the LHCL stake which thus raises SLIC’s stake to over 60 percent.

Navaratnam, asked about allegations of high staff cost, said the hospital had to bring down doctors from India and had an agreement with them for guaranteed income. He said that for a complete hospital they needed certain departments and it was important to man them well. “This was essential for the first few years till the practice picked up,” he said. Staff expenses at Apollo hospital was a phenomenal over Rs 500 million in the last financial year for a staff strength of 700 much higher costs against local hospitals like Nawaloka for example which has a staff strength of 1,700 and staff costs of Rs 232 million according to its latest report.

Asked to explain this disparity, Navaratnam said that Apollo had outsourced everything from clearing to security except the core function unlike other hospitals. Some shareholders said this high cost had eaten into dividend payments.

Amidst high gearing, LHCL reported a net loss of - Rs.14 million for 2007 first quarter, while reporting a modest profit of Rs.3.9 million.

About profitability issues that Apollo has compared to its counterparts, he said that it is unfair to compare Apollo with the established hospitals. “We are only three years old. It is unfair to compare with Apollo with the established hospitals,” he said.

LHCL operates Colombo's 350-room Apollo Hospital. LHCL's earnings have been relatively disappointing since its inception (retained losses of - Rs.530 million as at end of the year). Market analysts said that the hospital's premium pricing strategy and service charges targeting the high-end customer have not found favour in the local market. Apollo also does not operate its full bed inventory due to resource limitations. This is in contrast to the occupancy constraints faced by competing private sector hospitals in Colombo amidst rising demand for private health care.

Indian High Commission spokesperson Nagma Mallick, speaking on behalf of the High Commissioner Nirupama Rao who was out of country, said the High Commission has no ‘personal views’ on the matter

"I have only the news reports that you have regarding the offer that has been made by Harry Jayawardene to the Indian investor. On this, I would say that the government of India is interested to promote Indian investors in Sri Lanka and the government is also interested in promoting Sri Lankan investors in India. We are interested in expanding trade and investment ties in every way possible. If an Indian investor feels that a worthwhile offer has been made and he accepts it, then it is fine. The High Commissioner has no personal views on this matter,” she said.

Jayawardena upped his stake to 36.07 percent from the earlier 20 percent through SLIC, triggering the Takeovers and Mergers Code recently. Apollo Hospitals Enterprises had 32 percent and Property Development Ltd (PDL), a government entity which is the holding company of the Bankof Ceylon tower building owns 13.62 percent.

SLIC is expected to hold more than two thirds of the equity of Lanka Hospitals Corporation (LHCL), the holding company of Apollo with the completion of the mandatory offer at an estimated total investment in excess of Rs.2 billion.

Analysts said that LHCL's attractiveness lies in its central location and unutilised real estate, which facilitates expansion. While Jaywardene-led Distilleries/SLIC have no expertise in the healthcare sector, in the past the company has tasted success in acquiring and successfully running unrelated businesses. Distilleries’ associate firm, Aitken Spence & Co. too has expressed interest in setting up a hospital jointly with Raffles Hospital of Singapore.

Analysts said that the book value per share of LHCL being Rs.7.1 (as at 30th June 2006), the possibility of a goodwill charge on the earnings of SLIC/Distilleries arises, although LHCL's lease hold land could be revalued to minimise the impact on earnings.