By Lubna Hamdan
He's been called the world's most feared short seller, causing nearly a dozen companies to be shut down or delisted. Now, Muddy Waters' Carson Block is digging into UAE-based healthcare operator NMC Health, with his first damning report wiping nearly $2 billion off its market value.
All it takes for Donald Trump to declare war on Iran is a single tweet to his 70 million Twitter followers.
While Carson Block may only have about 0.1 percent of the number of followers of the US President, one of his recent controversial posts proved to be just as powerful and set in motion a series of events that wiped nearly $2 billion off the value of the UAE’s largest private healthcare provider.
On December 19, shares of NMC Health fell the most on record after the London-listed hospital operator was targeted by Block, the founder of San Francisco-based Muddy Waters Capital and arguably the world’s most feared short seller.
“With every single company, including the six that have been delisted, we’ve had pushback from people whose first instinct was to trust managment”
In a 34-page report, Block said he had “serious doubts” about NMC Health’s financial statements and concerns over possible “fraudulent asset values and theft of company assets,” and disclosed a short position in the company.
NMC Health hit back, calling the report “baseless” and announcing an independent review that would focus on the group’s cash balance as of December 15, 2019.
But the trouble with the operator began long before Block’s report. It was on August 6, to be exact – the day before Muddy Waters shorted FTSE-listed litigation fund Burford Capital – when alarm bells began to ring.
“I sent out a tweet [in August] that I thought was fairly innocuous. I said we were our announcing our next short at 8am tomorrow London time. I didn’t even expressly state that it was London listed - that’s what it implied - but there were three stocks that took a dive on that tweet,” Block tells Arabian Business.
“The stock that dove the most was Burford [Capital], which was down close to 20 percent at one point… When we looked at that, I was stunned. This was a nonspecific tweet. The most specific detail was that we’re doing something in London, and it made me think wow, this company has a lot of shareholders who evidently feel they are on a train that is heading off the cliff so they just want to ride their train as long as they can and hope they can jump off just before the cliff.
“That’s relevant to NMC because the stock that took the second biggest dip on that tweet was NMC. That made me think wow once again, we have an investor base that seems to have serious concerns about the company.”
Burford Capital’s shares lost nearly £1.2 billion ($1.574 billion) in market value in one day after shares crashed 60 percent. Confident and victorious, Block began digging into NMC Health.
His first red flag was the company’s use of reverse factoring, of which many investors were unaware. Unlike traditional invoice factoring, reverse factoring is a form of borrowing where a bank or finance company commits to pay a firm’s invoices to suppliers at an accelerated rate in exchange for a discount, though the payments do not class as debt.
“Some of the things that were really interesting to us were the reverse factoring facilities, because it goes right to the credibility of management. We pretty quickly concluded that management was misleading because investors were under the impression that the company was denying using reverse factoring, and I think [NMC’s] response to our report was misleading on this and some other points,” Block says.
“This would be a great time for NMC to tell investors if there are old structures like these in place and get into detail on the debt...my advice is to put it out there now”
NMC said the method “simply provided an undertaking in the form of a guarantee to settle the accepted trade payables against each invoice” - a response that only propelled Block to dig deeper. He wasn’t alone in his suspicions.
In December analysts and investors expressed unease around the company’s raising of hundreds of millions of dollars of off-balance sheet debt to fund new hospitals. Last year, it looked to raise a €200m ($223m) loan through a chain of special-purpose vehicles, including a Dubai entity, to fund the construction of hospitals across the Middle East, according to draft deal documents seen by the Financial Times.
The majority of NMC’s reverse factoring, including the efforts to raise the €200m loan, was arranged by London-based Blackstar Capital which specialises in raising working capital finance. The FT reported that people familiar with the deal described the method as “highly unconventional”. For Block, it was another sign that NMC should “come completely clean sooner rather than later”.
He says: “Well this would be a great time for NMC to tell investors if there are old structures like these in place and get into detail on the debt because if we or the FT or others continue to pick that apart and there’s more out there, it’s just going to look awful for the company. My advice is put it all out there now.”
But Block has faced criticism himself. Outspoken critic and CEO of Universal Strategies, Sabah Al-Binali, calls the short seller’s Muddy Waters report “vacuous” and says most of it is based on “conjecture”.
Of NMC’s use of reverse factoring for some of its facilities, Al-Binali argues: “The gist of [Muddy Waters] argument here is that they believe some of [NMC’s] leases should be classified in a way that would make them debt on the balance sheet. What Muddy Waters does not make clear, and they would have learnt this had they taken Financial Analysis 101, is that a lease is a liability regardless of whether it is considered debt. A first year analyst who doesn’t understand this would be fired on the spot.”
While the Muddy Waters report points to potential overpayment for assets by NMC Health, particularly in regards to Brightpoint Hospital [now NMC Royal Women’s Hospital], Al-Binali argues that Block is “ignorant” of the UAE and the GCC.
“A first glaring example is their assertion that the construction of Brightpoint Hospital is at an inflated price… Muddy Waters then tries to do a comparable, which shows their complete ignorance of the UAE and GCC. As an example, they list NMC Royal, Khalifa City as having a cost of $3,793/sqm whereas Brightpoint was $7,686/sqm. Anyone who knows Abu Dhabi knows that the location of Brightpoint is prime relative to Khalifa city, not least because Brightpoint is on Abu Dhabi island whereas NMC Royal is on the mainland and the difference in land costs alone are much greater. Comparing the two locations is like comparing Manhattan Island with Brooklyn.
“Furthermore, when Brightpoint opened in 2014 this was at the height of the UAE’s economic cycle. NMC Royal opened in 2016, two years after the collapse of the oil price that deeply affected land prices. A second comparison is to two hospitals in Saudi, which has a land mass greater than Western Europe, relative to the scarce land on Abu Dhabi island. Muddy Waters is clueless or intentionally misrepresentative,” Al-Binali says.
The Emirati CEO also questions Muddy Waters’ unnamed sources, hinting at Block’s possible use of bias investigators to manipulate financials.
“Muddy Waters repeatedly talks about ‘sources’ that their investigators received information from, without naming those sources or providing credible evidence to support these so called sources. If Muddy Waters is accusing NMC of using related parties as a way to manipulate financials, how do we know that Muddy Waters isn’t using their related investigators to manipulate their report? Why did Muddy Waters not hire an independent, credible, internationally renowned investigative company?” Al-Binali says.
“We would certainly work with the regulator over any concerns about the authenticity of the sources while also protecting them”
Block, who is no stranger to backlash or criticism, claims he can “prewrite” the reactions of companies and defenders.
“With every single company, including the six that have been delisted by regulators, we’ve had pushback from people whose first instinct was to trust management. We come from a perspective of, if we detect certain patterns that we feel are patterns of deception then we’re not going to trust what management says, we’re going to look to validate what the company claims and discloses and what management says and when we come out from that perspective, then we find a lot of issues with NMC’s financials and disclosures.
“But, frankly, most investors don’t come at it from that perspective and don’t have the ability because they haven’t focused on this, aren’t good at recognising patterns of deception and are therefore much more credulous of management,” he says.
The short seller also defended his unnamed sources, arguing that they remain anonymous for safety purposes.
“I mean, look, we’re not trying to put people’s wellbeing at risk and we know who the sources are. If the regulator ever wanted to have a conversation with us, we would certainly work with the regulator over any concerns about the authenticity of the sources while also protecting their wellbeing.
“We’ve discussed our use of investigators with them and it has thus far passed all scrutiny so in a world where managements do lie, you have to do more work, develop sources to really find out the truth and prove out the lie,” he says.
It remains to be seen whether NMC’s own review will pass scrutiny. In a public statement, the company said it is “confident that this review, when complete, will be entirely confirmatory of the disclosures provided by the company to date.”
Block is cynical, and says such independent reviews as “hugely corrupted processes”.
He says: “A lot of the time it’s ‘we found no evidence to support the allegations of’ – okay, well, where did you look? Where didn’t you look? What was the actual scope of your engagement? What were you allowed to do? Where you searching computers without warning? Did you walk in and say, everybody give me your computers now? Or were these things scheduled in advance? Who had knowledge ahead of time? Was there data that was wiped? We’ve seen that in independent investigations.”
On January 8, as we went to press, NMC Health shares took yet another dive - this time 19 percent - after two major investors sold $490 million worth of shares well below the market price, with the proceeds going towards paying down debt. The investors Saeed Mohamed Butti Mohamed Khalfan Al Qebaisi and Khaleefa Butti Omair Yousif Ahmed Al Muhairi both sold around 15 percent of NMC for about 1,200 pence a share.
They have, however, agreed to retain a combined stake of around 17 percent which they will place in a temporary lock-up. Of the two shareholders’ sale, NMC Health said in a statement that it is unrelated to the company’s performance.
“NMC recognises that the motivation for the transaction, as made clear in the launch statement of 7 January 2020, pertains only to the means of financing the investors’ shareholdings and not to the company’s operating performance nor long-term prospects,” it said.
“H.E. Mr Saeed Mohamed Butti Mohamed Khalfan Al Qebaisi and Mr Khalifa Bin Butti remain supportive and long-term investors in NMC.”
While it’s unclear whether Al Qebaisi and Al Muhairi sold their shares in the troubled healthcare group as a result of the Muddy Waters report, Fahim Al Qasimi says NMC is an obvious case of corporate governance failure. The partner at Dubai-based corporate advisory and investment firm AQ&P says corporate governance is “only as good as it is tested” and that NMC has undoubtedly failed the test.
“A board with a clear mandate should have strategic communication and disclosure as one of its core functions. Irrespective of whether the report is true or not, it’s out there and investors trusted the due diligence of Muddy Waters to the point where they started selling the stock. The board did not have the mandate it needed – and by mandate I don’t mean in writing but in terms of really functioning - to be able to prove in time that the allegations weren’t true,” he says.
His advice to the board is to restructure and raise investor confidence, and steer clear or challenging Block.
“…if you read through the corporate governance reports of NMC, it infers a lot that the board basically receives a bunch of information from management, the whistleblowing policy doesn’t work, there’s no objectivity on behalf of the board, and even in the language they use about what they do, it’s not what the board should do.
“It’s very 1980s corporate governance: ‘we approve the strategy, we approve this, we approve that’ rather than setting a mandate and steering and that’s where the corporate governance failure is… Don’t think you can go out and start challenging short sellers. What you need to be able to do is use them as this new citizen journalist, to a certain extent, that can go out and publish information on any company as long as it’s not inside information. It’s very easy to do,” Al Qasimi says.
Writing a report based on publicly available information may be easy to do, but taking down NMC may not be as simple. According to Block, it will depend on how much resources the Financial Conduct Authority will be willing to allocate to the case given high costs of overseas investigations, particularly with documents in foreign languages.
But in terms of typical investors, he says they will be “fully convinced that NMC is a problematic company with significant issues with its financials”.
NMC declined to comment on predictions for its future, despite multiple contact attempts by Arabian Business.
In the past, Block has also attempted to contact some of the critics and investors in the companies he has shorted. The reactions, however, have not been pleasant.
“...I used to try to reach out to people who are vocal critics and say ‘listen, I understand you’re upset but let’s talk this through, it’s actually the management that has done this to you, I’m not the bad guy here’. And most of the time when I reached out like that, the response would be f--k you. I just stopped reaching out,” he says, laughing.
“I also came to understand retail investors’ mentality when they own highly speculative stocks. The first iteration of the business was Chinese companies listed in the US and Canada. Many retail investors were really buying lottery tickets in the form of these stocks and the reason they were so upset is I was snatching these lottery tickets out of their hands and tearing them up in front of their faces,” he says.
The reactions include a constant series of terrifying death threats, but it’s an indicator of performance for Block.
“We half joke that death threats are a key performance indicator and that if we publish something and didn’t get any death threats then we clearly weren’t doing our job well. I don’t actually relish the death threats, they’re not fun, although I’m not worried about the people who send an email but the people who don’t send the email,” he says.
It is no wonder he is called the world’s most feared short seller.
“It makes me chuckle,” he says of the title, “I’m like anybody else”.
Yet unlike most short sellers, Carson Block has made a name for himself that is enough to take down large and respected companies with a single tweet to his 86,000 Twitter followers.
The normal approach in business is to buy low and sell high in order to make a profit. Short selling is, effectively, a reworking of this principle.
A short seller agrees to sell a stock they don’t own at a certain price in the future, on the belief that it will fall in price in the short-term. If the price does tumble, they can buy it up quickly at the new lower price and then sell it on, as agreed, at the original price, and pocket the difference.
The profits as a result of such a move can be massive, but the skill is knowing that the price is going to drop so you can benefit from the difference in the buying and selling price.
Famous examples include hedge fund manager John Paulson who made almost $4 billion dollars when he predicted the subprime crisis and shorted the US housing market, and the infamous George Soros who made $1 billion in one day in 1992 when he bet against sterling and is often referred to as ‘The Man Who Broke the Bank of England’.
In 2017, UAE bourses began allowing short selling and Egypt approved it in November 2019. Turkey banned the practice last year and some European countries have considered taking action against short seller, which Carson Block told Reuters would be a “global war against truth”.
NMC Health (report on Dec. 17)
In a sign of how seriously investors are taking his critique of London-listed NMC Health, trading in the stock has surged to an average of almost 4 million shares a day since the report, compared with 563,000 daily in the preceding three months. The company said the report is “false and misleading,” adding that it has a “track record of significant, open and increasingly detailed disclosure to the market”. NMC Health bought back shares the day after the report was published.
PeptiDream (report on Nov. 6)
Shares in Tokyo-listed PeptiDream Inc. fell 4 percent on Nov. 7 but have recovered and are up 5.8 percent since the short seller questioned the level of activity at the company’s drug development partnerships with pharmaceutical companies. PeptiDream disputed the contents of the report, saying it holds a “completely different view”. The company said its 101 programs are all active programs, with no dead or dormant ones.
Corestate (position disclosed on Oct. 16)
Corestate Capital Holding SA fell 19 percent in Frankfurt the day Muddy Waters revealed in a filing that it’s shorting the real estate company. It’s erased the losses and now is up 2.9 percent since the disclosure. The firm didn’t publish a report outlining its case, a new approach Muddy Waters has taken in France and Germany. Regulators in those countries have responded to short sellers’ reports of corporate misdeeds by investigating the short sellers for possible market manipulation. Corestate routinely declines to comment on investor motives, a spokesman said at the time.
Burford Capital (report on Aug. 7)
London-listed Burford Capital Ltd. slid 46 percent on Aug. 7 after Muddy Waters said the litigation-finance company overstates the returns on its investments and has questionable financial reporting and governance. The stock is still down 36 percent since the report. Burford said the short seller’s critique was “false and misleading”. Chief Executive Officer Christopher Bogart and Chief Investment Officer Jonathan Molot bought shares in the days after the report was published, and named a new chief financial officer to replace Elizabeth O’Connell, who is married to Bogart.
Anta Sports (report on July 7)
Anta Sports Products Ltd. has surged 28 percent in Hong Kong since Muddy Waters said it’s shorting the stock because of concerns over its financial reporting and relationship with distributors. Anta said the report contained “untrue and misleading information”. Other short sellers also have failed in efforts to deflate the stock.
Solutions 30 (position disclosed on May 18) Solutions 30 SE dropped 25 percent on the first day after a filing showed Muddy Waters was shorting shares in the Paris-listed technology-services company, and it’s still down 18 percent. It’s another case in which the short seller didn’t publicly discuss its investment thesis. France’s market regulator investigated Muddy Waters for a 2015 report detailing its bearish investment thesis on Casino Guichard-Perrachon SA; the watchdog closed the probe this month with a warning to both Muddy Waters and Casino. Solutions 30 said it remains confident in its business model.
Inogen (report on Feb. 8)
Inogen Inc. ended the day down 2.2 percent in New York after the short seller’s report, but it’s now fallen 51 percent. Muddy Waters said the health-care product supplier will likely hit peak sales this year if not in 2020. The company subsequently cut its 2019 revenue forecast twice, each time below the lowest analyst estimate.