Cube Midcap Report (10 Feb 2020) – Shetty loses count #NMC #FIN
In today’s midcap report, I’m going to attempt covering the bizarre situation involving Dr. BR Shetty, Founder and Chairman of NMC Healthcare (NMC). According to one of this morning’s RNS announcements, he is unsure how many shares he owns in the business.
- NMC Healthcare (NMC)
- Finablr (FIN)
There have been announcements from two small-caps I own – Volvere (VLE) and Tandem (TND). I might discuss them in separate articles, if I have time this afternoon.
Timings: finished at 11.30pm.
NMC Healthcare (NMC)
- Share price: 754.3p (+8%)
- Market cap: £1,575 million
Not one but two newsworthy statements from NMC.
The first is truly strange:
Dr. B. R. Shetty and his advisers are in the process of carrying out a legal review in order to verify the total interests of Dr. B. R. Shetty, his associated family members and his associated family holding companies in the Ordinary Shares of the Company… the holdings and interests of Dr. B.R. Shetty, H.E. Mr Saeed Mohamed Butti Mohamed Khalfan Al Qebaisi and Mr Khaleefa Butti Omair Yousif Ahmed Al Muhairi have been incorrectly reported historically to the Company and the market.
How bizarre! We are told that:
- 4.8 million of Shetty’s NMC shares are being transferred from one bank to another… “in connection with security arrangements given by Dr. B. R. Shetty in favour of First Abu Dhabi Bank, and that those security arrangements relate to credit facilities made available by First Abu Dhabi Bank”. This suggests to me that there has been some sort of margin call triggered by the recent collapse of the NMC share price.
- 5.1 of other NMC shares owned by Shetty are subject to a share pledge relating to credit facilities at one of these banks.
- 20 million shares held by one of Shetty’s private companies might be beneficially owned by the two other individuals mentioned above, not by Shetty (due to a memo of understanding between these individuals and the private company). Note that one of these individuals (Khaleefa Butti) is Executive Vice Chairman of NMC!
- 9.1 million of these shares may have been transferred to various banks, “subject to security arrangements”. Again, this could mean that margin calls are triggered and the share could be sold.
The Board “is urgently seeking clarity from each of these shareholders on these points”.
Trading update – NMC says that operations “continue to perform strongly”, and 2019 was in line with expectations.
Possible offer – in the second RNS, we learn that private equity giant KKR and a Swiss-based investor GK have made “highly preliminary approaches”. No proposal has been made yet and there have not yet been any negotiations.
The smartest thing for most investors to do, in my opinion, is to avoid stocks from exotic jurisdictions where it is impossible to do due diligence on the ground.
That simple rule would have helped investors to avoid the crazy rollercoaster ride in the NMC share price over the last few years.
The Muddy Waters bear report in December noted that insiders had pledged their shares:
Then there are share pledges we calculate approximate £700 million, making the effective cash out larger. Perhaps tellingly and troublingly, NMC recently entered into a $105 million facility
arranged by a regional bank that is chaired by Khalifa Bin Butti. Rather than disclose these facts, just recently a coverup of this facility seems to be underway with the bank expunging the
details from its website.
Share pledges by insiders are another huge red flag for me, even in the absence of confusion about the numbers involved.
We have seen this before, e.g. with Quindell (QPP). Share pledges can be used to conceal the extent to which insiders have “cashed out”. They also have the side-effect of provoking extreme share price movements, when the bank or other lender gets cold feet (e.g. after a bear report is published and the share price collapses!)
Indeed, the use of Tesla ($TSLA) stock as loan collateral by Elon Musk was one of the red flags which alerted me to the possibility that Tesla could be an excellent short candidate. I haven’t been proven right yet about that (the share price has performed incredibly well), but I do think that this practice elevates the risk in the shares for everybody, not just the insider who is borrowing against them.
In my experience, executives who have borrowed against their shares tend to have an unhealthy obsession with their stock price (for reasons which are easily understood) and have a shorter time horizon than executives whose standard of living is unaffected by temporary gyrations of their stock.
NMC was already outside my investable universe due to its operations in the UAE, where I have no geographic expertise.
The red flags noted by Muddy Waters are also worth taking into account. I would tend to avoid companies where the insiders have pledged their shares – I don’t think their interests would be aligned with mine.
Finally, the complicated arrangements and failure to report accurate shareholding info by NMC’s executives would be another very major red flag. To be unable to count your shareholding means that you must have created an extremely complicated web of relationships. And the motivation for doing that, whether it is stupidity or something more sinister, can hardly reflect well on the company’s prospects.
KKR and others may see value at current levels, and doubtless some private investors will be tempted to speculate on a bid approach materialising. For anyone with a moderate degree of risk aversion, however, I think that NMC is one stock to strongly avoid.
- Share price: 76.975p (+8%)
- Market cap: £538 million
This is another part of the Shetty empire. And it might be caught up in similar issues:
The Company has very recently been made aware of purported arrangements between Dr BR Shetty, His Excellency Saeed Mohamed Butti Mohamed Al Qebaisi and Khaleefa Butti Omair Yousif Al Muhairi which may be relevant to their respective interests in the Company’s shares.
The extent to which the purported arrangements may have affected their respective interests is not yet known to the Company. The position is being reviewed by the Company and a committee of independent directors of the Company. The Company will make appropriate announcements in due course.
As I noted last month (with the share price up at 129p, I might add!), there are large columns of smoke billowing above Finablr. I’m going to tentatively describe it as a bargepole midcap (but I wouldn’t be surprised to see it dumped from the FTSE-250 soon, and fall back to small-cap territory!).
There’s nothing else of interest in midcaps today, so I’ll hang up my pen there.