NMC Health, an Abu Dhabi-based firm listed on the London Stock Exchange, has suffered a sharp loss in value as a consequence of its dispute with a forensic short seller, Carson Block, the man behind Muddy Waters Research.
Block has bet against the stock because he believes that it is reporting returns that are too good to be true. He determines this in part by the use of comparable UAE-based firms, Mediclinic International and Aster DM Healthcare. Then he infers that the reason the reported returns are so good isn’t to be found in the returns, but in the reporting. Specifically, he maintains that NMC acquires dubious assets at inflated valuations, sometimes from parties the MWR report describes as under “de facto common control.”
It is worth getting granular with the Muddy Waters report, and especially with the portion of it devoted to one of those allegedly dubious acquisitions, because it is a good illustration of the use of forensic shorts as a group.
Getting Granular
For example, in June 2018, NMC bought control (70% of the equity) of Premier Care Home Medical and Health Care LLC for $36.4 million. But the MWR investigation indicated that Premier was “an insignificant company when purchased,” with approximately 10 employees. Informed observers (not named in the report but said to be familiar with the industry) are described as amazed when told of the purchase price.
As of that time, Premier had allegedly treated only 60 patients, said one former employee.
There was only one financial advisor for the transaction, and that was Guggenheim KBBO Partners Investment Banking, which is a joint venture partner with Khalifa Bin Butti’s KBBO Group. The report also traces connections between KBBO on the one hand and NMC on the other, which cause Muddy Waters to doubt the arm’s length character of this advisory relationship. For example, NMC has a $105 million three-year facility which has been arranged by the First Energy bank—the bank where Khalifa Bin Gutti had become chairman in May 2016.
The MWR report adds, “NMC made no disclosure or announcement of this facility, which we see as unusual based on its history.”
In November 2019, NMC bought the remaining 30% interest in Premier from NOVA Health Investments LLC. The price of the transaction has not yet been disclosed.
So, as the Premier Care example illustrates, Muddy Waters makes the case for the purchase of dubious assets, and for real issues as to appropriate governance. Another important theme of the report involves its cash balance.
NMC’s Cash Balance
How much cash does NMC has on hand? Its balance sheet showed $491 million at the end of 2018. Typically an entity with that much cash at hand will have interest income, as the cash isn’t stashed in a mattress. NMC has very little interest income and, on the other side, does a lot of borrowing. These are red flags that the cash balance could be “materially overstated.”
Further, it keeps rolling over its loans, even as its average interest rate balloons and prudence would suggest (especially if it did indeed have $491 million at hand) paying them down. The average interest rate rose from 3.9% to 5.7% in 2018.
The market found the MWR charges credible. After the release of the report, the stock price of NMC lost more than half its value.
Three Hands
There are two broad approaches an issuer can take when it comes under such an attack. It can admit to all or some of the allegations and propose its own fixes for them. Or it can deny and denounce the shorts’ analysis as self-serving (which it definitionally is) and as false (which requires confrontation on the particulars.) It is possible to mix and match these two approaches: with results that are sometimes felicitous, sometimes not.
NMC has mixed the approaches. On the one hand, it has said that the report is “false and misleading.” On the other hand, faced with the exchange-floor bleeding, NMC promised an independent review of its books. And we’ll add in an anatomically incorrect third hand, which is that NMC’s replies seemed to many observers lacking in detail, and NMC promised to remedy that defect with details “in due course.”
As Jim Armitage, writing for the Evening Standard, said, “Surely if the work was … riddled with errors, NMC could—some 20 hours after the Muddy note was published—have given at least one fact-filled rebuttal.”