NMC starts review of books after short seller attack

Dubai: UAE’s NMC Health on Monday began an independent review of its accounts, a week after U.S. short-selling firm Muddy Waters critiqued the hospital operator’s books that led to a huge share selloff.

After the news, shares of UAE’s largest healthcare operator gained 30 per cent after falling for four straight days and losing nearly 50 per cent or $3 billion in value.

The UAE-based firm said the third-party review would be undertaken by an accounting firm, without specifying the name of the firm, and added that the review would be overseen by a committee consisting of independent non-executive directors of NMC.

American short-seller Carson Block’s Muddy Waters raised “serious doubts” about the company’s accounts last week, questioning the group’s asset values and cash balance. NMC listed out “factual inaccuracies” in a lengthy 3,500-word response, concluding that the report was “false and misleading”.

“Following the attack on the company last week, we issued a detailed rebuttal and are disappointed with the very material and, we believe, unwarranted share price reaction,” NMC said in a statement on Monday.

The company stood its ground soon after the scathing report was released and said it has not withheld any relevant information to the markets. It also tried to reassure rattled investors by buying back $200 million in shares and reaffirming its fiscal guidance for this year and the next. “We are confident that this review, when complete, will be entirely confirmatory of the disclosures provided by the company to date,” NMC said.

Muddy Waters questioned NMC’s use of certain financing methods that do not get recorded as debt in its balance sheet. In response, NMC said these facilities are “commercial matters” for its suppliers, adding it has never told investors that its suppliers “have not used, or are not using” these techniques. The Financial Times reported on Friday that NMC held talks this year to raise 200 million euros in ‘off-balance sheet’ debt to fund new hospitals, citing people familiar with the matter.

“The short-seller’s allegations have put insufficient corporate governance in the region in the limelight”, analysts at Arqaam Capital earlier wrote in a note. “We think corporate governance issues will have to be addressed in the MENA region, with more independent board, enhanced transparency, integrity, accountability and particularly scrutiny of related party transactions, and a better alignment between management compensation and shareholders’ interests.”

Overhanging allegations

The analysts added that it expects the allegations raised by Muddy Waters to remain an overhang on the stock, due to the collateralization of 12 million shares of major shareholder Khalifa bin Butti, who is the executive vice-chairman of NMC.

Muddy Waters is widely known for declaring short equity positions in financial markets based on its own research. Short sellers borrow shares, quickly sell it, and then buy the stock back to return it to the lender, aiming to pocket a capital gain on the anticipated drop in prices. While some argues it depresses successful companies’ share prices, others say short sales improve market efficiency.

“We will also be progressing relevant legal and regulatory options following the actions taken by third parties to mislead the market and manipulate the share price,” the company said. “We will keep investors updated as we progress these initiatives in the coming weeks.”

Muddy Waters, which didn’t disclose the size of its short position in NMC in the report, isn’t the only financial institution to take a short position against the health care firm. AQR Capital Management has a 2.69 per cent position against the stock and PSquared Asset Management holds 1.1 per cent, according to data from the UK Financial Conduct Authority.

The short-seller earlier this year went ‘short’ on London-listed litigation finance firm Burford Capital, whose shares tanked 60 per cent after the reveal and later argued Muddy Waters engaged in “market manipulation”. Last year, Muddy Waters shorted London-listed chip maker IQE, an Apple supplier.

Muddy Waters has taken high-profile bets on other companies in the past. These include Singapore-based agricultural commodities trader Olam, China’s most valuable sports company Anta and China Huishan Dairy, which was once China’s largest dairy farm operator before going bankrupt.