The Malaysian government’s fund Khazanah has become more aggressive since last year and is ready to go miles to protect ‘national interests’ from falling in the hands of foreigners—in this case Parkway ending up as unit of Indian-owned Fortis

The control battle for Singapore-listed hospital chain Parkway Holdings Ltd has brought Khazanah Nasional Berhad (Khazanah) to the forefront as an aggressive sovereign fund of the Malaysian government, which so far has remained somewhat under the radar.

Khazanah Nasional, literally translated, means National Treasury. Khazanah is the investment-holding arm of the Malaysian government and is empowered as the government's strategic investor in new industries and markets.

Khazanah is in the news due to its possible control war with India's largest healthcare chain Fortis Healthcare Ltd. Last week, Khazanah, which holds 23.8% stake in Parkway, made an open offer to increase its stake to 51.5% at 3.78 Singapore dollar (S$) per share. Fortis, on the other hand, holds 25.37% stake in Parkway, making it the largest stakeholder in the company.

The journey of Parkway and Khazanah and their relations over the years is quite fascinating and may hold a potential for a Bollywood film.

Fortis, led by the Singh brothers, Malvinder and Shivinder, had bought stake in Parkway from US-based TPG Capital by paying S$959 million. Earlier, in 2005, Newbridge Capital, which later morphed into TPG Capital, emerged as the largest shareholder in Parkway. Newbridge top brass was handling Parkway management.

Soon, Parkway decided to bid for Pantai Holdings Bhd, the other healthcare services provider from Malaysia. In 2005, Parkway bought Pantai shares from the latter's chief executive Datuk Lim Tong Yong. Next year, Parkway emerged as the highest bidder for Pantai, which led to a political storm in Malaysia. Political parties alleged that since Pantai's units held key concessions from the Malaysian government, its control should not fall into the hands of foreigners (in this case Newbridge). Politicians from the ruling political party had said they were unhappy that the concessions-one for health screening of foreign workers and another for the provision of state hospital services-had fallen into foreign hands.

Enter Khazanah to save the day. Khazanah for a start bought 6.6% stake in Pantai through its unit Pantai Irama Ventures Sdn Bhd for an undisclosed amount. At that time, it said that it believes the strategic interests of the nation (Malaysia) will be protected in this manner the commercial interest of Pantai and its investors will also be served with this partnership.

What Khazanah meant by partnership was nothing but its arrangement with Newbridge to run Pantai operations. Under the partnership, both Khazanah and Newbridge formed a special purpose vehicle (SPV), which would hold Pantai stake. However, due to the political heat, Khazanah was made to hold a majority stake in the SPV and it was decided that Parkway management (led by Newbridge) would continue to run Pantai hospitals.

This arrangement started a new relationship between both the fund and the hospital chain in such a way that later Khazanah ended up with a significant (23.2%) stake in Parkway. Using Khazanah's shareholding, Parkway also formed fruitful relations with India's Apollo Hospital Enterprises Ltd. Both Apollo and Parkway together run a hospital in Kolkata. In 2002, Apollo Hospitals bought 50.26% stake in Duncan Gleneagles Hospital for Rs3 crore, which was struggling to get off the ground. It was a joint venture with GP Goenka group.

While the relations between Khazanah, Parkway and Newbridge (TPG) were sailing smoothly, in March 2010, TPG decided to exit Parkway. It sold its 23.9% stake to Fortis, owned by the Singh brothers. Two years ago, the Singh brothers sold their entire stake 34.8% stake in Ranbaxy Laboratories Ltd, India's largest pharmaceutical company, to Japanese Daiichi Sankyo at Rs737 per share. So, money may not be a problem for the Singh brothers if they decided to counter-bid Khazanah's offer to Parkway. (read more http://www.moneylife.in/article/8/5766.html )

The real question is whether they would be allowed to do so by the Malaysian government, given that TPG or Newbridge had to broker a mid-way to control Pantai?

Although Khazanah is a national fund owned by the Malaysian government, till last year it was looked as more sober or less aggressive compared with Singapore's state-run funds, Government of Singapore Investment Corp (GSIC) and Temasek. According to media reports, Khazanah was told to progressively divest its non-core assets in order to lure foreign portfolio funds back. Last year Khazanah made a total of eight divestments worth over 3.1 Malaysian ringgit (MR).

However, the fund still lacks real cash power compared to GSIC. Further, Khazanah does not receive a constant cash supply from the Malaysian government, which itself is struggling to cope with a persistent fiscal deficit and has to mainly be dependent on dividend income and gains from stake sales. Following its divestments, Khazanah may have some war chest to do more deals.

At the same time the fund has announced selling of Islamic bonds worth S$500 million to fund its Parkway purchase.

So, the first round of the Parkway battle appears to be won by the Singh brothers with the availability of huge cash and resources to manage more. But the second round may not be that easy for them. They need to keep in mind the Pantai deal and pave a way. There are three options left for the Singh brothers.

Fortis can either spend more and retain control of Parkway or end up as a minority shareholder or can sell its stake to Khazanah and walk away with some more money.