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Is IHH Healthcare Bhd Planning To Acquire A Hospital From Health Management International Ltd? What Would It Mean For Both Firms’ Shareholders?

According to a Business Timesreport published yesterday, IHH Healthcare Bhd (SGX: Q0F) is currently in talks with Health Management International Ltd (SGX: 588) regarding the acquisition of the latter’s Malacca-based hospital, Mahkota Medical Centre.

The report states that IHH Healthcare and Sime Darby Bhd (a conglomerate in Malaysia) have made offers for Mahkota Medical Centre, one of the largest hospitals in Malacca. Mahkota Medical Centre is 48.95% owned by Health Management.

At the time of writing (8:47 am), there’s no announcement made by both companies on the matter. Therefore, it might be better to just treat the aforementioned acquisition talk as speculation.

But, if IHH Healthcare is indeed planning to take over the Mahkota Medical Centre from Health Management, what might it mean for shareholders of both companies?

From details given in the Business Times article, the price tag of the hospital should be around US$250 million. That sum of money is definitely not an issue for IHH Healthcare given that it has more than RM2.47 billion (around US$690 million) in cash on its balance sheet as of 31 December 2014.

Moreover, taking over Mahkota Medical Centre might have little effect on the overall performance of IHH Healthcare as a business; the RM212 million in revenue generated by Mahkota Medical Centre in the year through June 2014 is less than 3% of IHH Healthcare’s total annual revenue in 2014.

As for Health Management, the deal might have a huge impact on its business. Given that the company has a market value of only S$225 million after the 20% jump in its share price yesterday, the US$250 million price tagged to Mahkota Medical Centre would have an outsized impact on the firm’s balance sheet, even after accounting for the company’s 48.95% ownership stake in the hospital.

But even if the sale might net a one-time windfall for Health Management, investors would still need to carefully consider what the company’s future plan is.

After the sale, the company would be losing a huge revenue and profit generator. Without proper reinvestment plans, Health Management might no longer be as profitable as before. For some perspective, Health Management earned total revenue of RM293 million for the year ended 30 June 2014.

Foolish Summary

At this stage, the sale of Mahkota Medical Centre is still just speculation as both companies have not made any official announcements regarding the matter. But, if the deal turns out to be true, it would likely still be “business as usual”, so to speak, for IHH Healthcare, as I’ve discussed earlier.

The situation is very much different for Health Management however. It would be interesting to see what Health Management plans to do with the sales proceeds. If the company decides to pay a special dividend with most of the proceeds, its future may be in question as it would have lost out on a significant driver of revenue.

This will be one interesting deal to follow.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.