Carson Block, founder and director of Muddy Waters

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Abu-Dhabi based healthcare firm NMC Health is embroiled in a bitter battle with U.S. short seller Muddy Waters, after the latter produced a report questioning the company’s accounting practices and sending its stock tumbling.

The Abu Dhabi-based healthcare chain saw its London-listed shares plummet more than 60% in mid-December after the activist hedge fund led by Carson Block announced that it had a bet against the stock, citing “serious doubts about the company’s financial statements, including its asset values, cash balance, reported profits, and reported debt levels.”

In its report, Muddy Waters raised concerns about overpayment in NMC’s $107.4 million investment in the redevelopment of NMC Royal Women’s Hospital and purchase of Premier Care Home Medical and Health Care LLC.

It also highlighted “red flags” in the company’s reported cash balances, suggesting margins were “too good to be true.”

“We believe that a significant part of the reason for this outperformance is NMC materially underreports its rejection rate for reimbursement, thereby inflating its reported margin,” the Muddy Waters report said.

“Another factor that could be assisting this inflation is purchases from related parties – we do not advise investors to be sanguine about this possibility, as the price to be paid for what could perhaps be perceived as a subsidy from the privately-owned businesses – could very well be overpayment for long-term assets and capex.”

The California-based fund also accused NMC of deliberately understating its debt by approximately $320 million as of the full-year of 2018, by failing to report leases associated with its acquisition of Aspen Healthcare as finance leases.

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Independent review

NMC’s shares gained some reprieve after the company announced an independent review of its books, but still ended 2019 down by around 34%.

Though NMC did confirm some aspects of Muddy Waters’ characterization of its debt, notably that it uses reverse factoring which is reported in trade payables, and uses extensive overdrafts, but called the report as a whole “false and misleading.”

Muddy Waters then called NMC’s response to its report “misleading, and outright false” in a further statement, and called on the hospital operator to disclose the amount of its liability for the Aspen leases for the first half of 2019 on its balance sheet. It also called for the release of a reconciliation of debt in NMC’s reported numbers for 2018 and the first half of 2019.

The original report claimed that the cost of $7,700 per square meter exceeded an expectation of $3,500-$4,000, based on 14,000 square meter estimate versus NMC’s claimed 18,600 square meters, which Muddy Waters suggested had included a parking garage that was stripped out of competitor hospitals’ areas in like-for-like assessments.

On December 27, NMC issued a statement claiming that it had obtained a letter from STH Consultant, the engineering consultancy retained for the NMC Royal Women’s Hospital project, confirming the total built-up floor area of the hospital at 18,595 square meters. It also released HAAD (Health Authority of Abu Dhabi) floor plans.

However, Muddy Waters’ assault has continued, and the short seller suggested that such independent reviews are usually “exercises in whitewashing,” citing examples of companies being exonerated by independent reviews only to collapse later, such as Noble Group and Sino-Forest.

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It called on NMC to “avoid cloaking the investigation under attorney-client privilege by engaging a law firm as part of the review,” and also to make the scope of the investigation public so that investors have knowledge of its limitations, along with releasing the full report to the public rather than channeling it through a press release.

NMC shares were trading around the flatline on Thursday morning with hostilities between the two parties looking set to rumble on through early 2020 as the independent review unfolds.



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