U.S. activist short seller Muddy Waters has upped its attacks on the debt profile, shareholdings and governance of NMC Health after the Lonon-listed hospital chain revealed interest from two private equity groups.
In a statement Monday, the Abu Dhabi-based company confirmed that it had received "highly preliminary" approaches from Kohlberg Kravis Roberts (KKR) and GKSD Investment Holding Group.
Italian-backed GKSD confirmed Tuesday that it could bid for the United Arab Emirates' largest private health care company, but KKR promptly ruled itself out, sending NMC's shares 17% lower.
In a separate announcement, NMC Health said a legal review was underway to verify the total interests in the company of major shareholder B.R. Shetty and his associated family members and holding companies, amid concerns over incorrect disclosures to both the company and the market.
Monday's disclosure revealed that 19 million of NMC's shares are potentially subject to undisclosed share pledges, while U.K. regulator the Financial Conduct Authority (FCA) has announced a probe into misstatements of holdings.
The announcements sent the stock surging to close 32% higher on Monday.
NMC Health has been under fire from U.S. activist short seller Muddy Waters, which bet against the company's stock citing concerns about financial statements and undisclosed debt, and the hedge fund on Tuesday said the disclosures reinforced its view.
"Today's bizarre disclosures about even more pledges and debt validate that the cockroach theory is alive and well — what we found is likely just the tip of the iceberg," Block said in a statement Monday.
"As for the notion that NMC might receive private equity bids, it's hard for us to believe they would survive due diligence."
The fund, led by Carson Block, raised the possibility that either NMC has undisclosed debt secured by share pledges or the pledges were "collateral for loans to related parties that transacted with NMC on non-economic terms, thereby subsidizing NMC's margins."
"In either scenario, debt would have effectively been used to pump up the value of stock, which would have in turn been used as collateral for (likely increasing) debt," Muddy Waters said in a research report Tuesday.
"To the extent our suspicions turn out to be correct, this circular symbiosis would be reminiscent of Enron's off-balance sheet debt structures in which Enron issued shares to 'special purpose entities', which borrowed money using the stock as collateral, and then bought (poor) assets from Enron. As with Enron, this circular arrangement would work until the stock value falls, which is what ultimately triggered Enron's collapse."
NMC Health did not immediately respond to CNBC's request for comment, and has yet to release a statement in light of the latest Muddy Waters allegations.
The new Muddy Waters report revealed details of additional previously undisclosed related parties that it alleged also appear to transact with NMC.
The research concluded that "deadly serious concerns'' remain about NMC's governance. While acknowledging that NMC's independent directors may not have reasonably known of the recently disclosed share pledges, associated debt or proxy ownership arrangements, Muddy Waters faulted the company for "likely allowing a minimalist approach to disclosure of related-party transactions."
"NMC hoped investors would dismiss our concerns about assets purchased from related parties at inflated prices. However, yesterday, NMC announced that there have been massive undisclosed share movements among B.R. Shetty, the Buttis, and various banks," Muddy Waters concluded.
"These facts are extraordinary. They weigh heavily in favor of our conclusions."