Lippo offer doesn't save Healthway shareholders from Cayman loan

A takeover offer launched earlier this week for Catalist-listed Healthway Medical Corporation (HMC) from Indonesian conglomerate Lippo Group will likely be welcome news to many minority shareholders of Singapore's largest medical chain.

But as things seem right now, not even a group with Lippo's financial muscle will be able to rescue the company from a massive and onerous loan agreement it has entered into, which has left shareholders caught in between the devil and the deep blue sea.

Shareholders of HMC still face a choice between paying the lender 16.5 per cent in interest or letting the lender convert the loan amount into shares that would result in a severe dilution.

That comes on top of giving the lender control over the appointment of top management, two board seats and veto power over major transactions.

And if HMC pays off the loan early, it still has to cough up heavy penalties.

In the spirit of good governance, all this perhaps could have been mitigated or averted had the board called for an EGM to seek shareholder approval for such a loan.

Some shareholders are also hoping the Securities Industry Council (SIC) or other local watchdogs may still step in.

Lippo Group on Tuesday offered, via its takeover vehicle Gentle Care, S$0.042 for each HMC share that it did not already own, conditional upon it gaining control of a more than 50 per cent stake in the company.

Gentle Care and its concert parties already controlled about 13.3 per cent of HMC when the offer was launched.

The conglomerate said in its offer document that it wanted to buy HMC because it saw business potential in Singapore's healthcare industry and wanted to establish a presence in this field.

But there was most likely another reason: HMC's S$70 million loan deal with Cayman-based investor Gateway Fund, that can be turned into up to 90.17 per cent of HMC's existing share capital or 47.4 per cent of its enlarged share capital, which would effectively hand control of the company over to the fund and dilute the holdings of other shareholders.

Under the terms of the agreement, HMC will have to pay interest of 12 per cent per annum on the loan for the first three months and 16.5 per cent per annum thereafter.

Gateway will also nominate two non-executive directors to the board and choose HMC's chief financial officer, and HMC cannot enter into any material transaction or change its chief executive officer without Gateway's consent, HMC said in a Singapore Exchange filing on Jan 17.

Yet another sticking point: If the SIC gives Gateway a whitewash waiver and HMC shareholders also agree at an EGM to a whitewash resolution, Gateway will be allowed to convert the loans into shares without having to make an otherwise mandatory general offer for HMC.

The conversion would spare HMC the high interest rates but result in severe dilution.

Shareholders will be able to essentially choose which they believe to be the lesser evil.

Unfortunately, neither option appears attractive, and it is surprising that shareholders appear to not have been allowed to vote on whether to borrow money from Gateway in the first place on such terms.

There also appears to have been no immediately obvious pressing need for HMC to borrow such a huge amount of cash.

HMC said in its filing that it intends to use about a fifth of the net proceeds to repay existing bank loans, another fifth for "general working capital and the remainder to pursue both organic and inorganic growth".

Incidentally, none of the board members at HMC appear to be substantial shareholders of the company, according to Bloomberg data.

Lippo said in its offer that it was "of the view that the terms of the convertible notes appear onerous, may be detrimental and not be in the best interest of the company in light of other possible financing alternatives".

But even if Lippo manages to gain majority control via its cash offer, the loan deal has already been signed, so it is unclear what it can do at this juncture to salvage the situation.

What is particularly striking about the loan agreement is how the board decided to enter into such an onerous and potentially convertible loan without first calling for an EGM.

Of course, HMC appears to have been well within its rights to do so.

Catalist rules do not require an EGM for a vanilla or non-convertible loan, regardless of the interest rate.

Shareholder approval is only needed if the loan is to be converted to equity and the number of shares to be issued is more than what is allowed in the general shareholder mandate.

Even so, perhaps an EGM should have been called right from the start, in the spirit of good governance.

One possible factor is that several of the board members are fairly new and may not have considered this aspect.

In such a situation, the expertise of the sponsor could be vital and a gentle, well-meaning nudge in that direction could have made a difference for minorities.

It is unfortunate that things did not turn out this way.

This article was first published on Feb 10, 2017.
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