Khazanah, which has made an open offer to buy controlling stake in Parkway, may not shy away from making a handsome profit if Fortis jumps into the race. But it would prove costly for Fortis shareholders

The Singh brothers, Malvinder and Shivinder, who sold their stake in Ranbaxy Ltd to Japanese Daichi Sankyo, are paying a huge price to control Parkway Holdings Ltd that could result in a massive cash outflow from Fortis Healthcare Ltd. As it is, the Singhs have paid a huge price for the ambitious acquisition. Parkway earned just 7.7% return on capital for last year for which the Singhs have paid 32.6X the net profit of 123 million Singapore dollar (S$) for the year ended December 2009.

Singapore-listed Parkway Holdings is in the news due to the possible control war between Fortis Healthcare and Malaysian government's fund Khazanah Nasional Bhd. Last week, Khazanah, which holds 23.8% stake in Parkway, made an open offer to increase its stake to 51.5% at S$3.78 per share. Fortis, on the other hand, holds 25.37% stake in Parkway, making it the largest stakeholder in the company. This has given Fortis four seats on the board of directors besides making Malvinder Singh the chairman of Parkway.

In March, US-based private equity group TPG Capital sold its 23.9% stake in Parkway to Fortis for S$959 million, valuing the business at over S$4 billion for just S$123 million of profit. Now, if Fortis wants to make a counter offer to Khazanah's offer, then the Indian company will have to go for full open offer to buy Parkway. This is because Singapore's take-over rules do not allow parties who have bought shares in the last six months to carry out a partial offer. That could potentially cost Fortis at least S$3.1 billion to buy out the remaining shareholders in Parkway at Tuesday's market price.

In other words, Fortis will have to shell out over S$4 billion, including the price it paid to TPG, for buying a company whose returns on shareholder's funds are just 7.7% for FY09. For 2009, Parkway's total revenues increased 7% to S$979.2 million compared with S$914.8 million a year ago. However, during the same period, its net profit increased 169% to S$124.9 million from S$43.4 million in the previous year due to better performance of its international operations.

Parkway’s Singapore operations remained stagnant in FY09, registering a 1% growth in total revenue to S$642.1 million from S$633.2 million in FY 2008, that too when Singapore is the largest source of the company’s revenue, accounting for 66% of total revenue for the year.

There are other angles too in the control war saga. However, if the Singhs decide to make an open offer for Parkway, there are chances of huge cash outflow from Fortis' Indian operations. This may be bad news for Indian shareholders.

According to media reports from Singapore, there remains uncertainty about the Parkway control. Khazanah, which has made an open offer to buy controlling stake in Parkway, may not shy away from making a handsome profit if Fortis jumps into the race.

Fortis is trying to get support from Government of Singapore Investment Corp Pte Ltd (GSIC) to make a counter-bid for Parkway. However, GSIC, which is a sovereign fund, has a mandate to invest in companies outside Singapore. Interestingly, GSIC holds 6.5% stake in Fortis besides an investment of $95 million through convertible foreign currency bonds issued by the company. If these bonds are converted into shares, then GSIC's stake in Fortis increases to over 13%. So in this situation, according to market sources, instead of jumping into the control war, GSIC may extend borrowing facility or grant a loan to Fortis.

Khazanah also has an Indian connection. Khazanah holds a 12% stake in Apollo Hospitals Enterprises Ltd while Parkway and Apollo jointly run a hospital in Kolkata.