A sale of its nutrition business to Danone and solid operating performance could rescue this debt-ridden company.
The tide is turning in favour of Habil Khorakiwala, the 68-year old chairman of Wockhardt. Two key events in the last fortnight indicate the company’s changing fortunes. First, is his company's decision to sell its nutrition business, which will help extricate Wockhardt from the huge debt burden it is currently reeling under. Second, is its improved financial performance for the quarter ending June 2011.
In what many analysts term as an attractive deal, the French multinational major Danone will pay over Rs 1,500 crore for the Indian company’s nutrition business which owns brands such as Farex and Protinex. This would be the second attempt by Wockhardt to divest this business after the first was scuppered by its foreign bond holders. While there are a handful of bond holders who are protesting the sale of this business and demanding their dues in full, if this deal goes through it could finally signal that the company is on its way out of a self-created mess. Though the company management did not elaborate on the litigation with its bond holders at the June quarter results briefing, Khorakiwala said that he expects the deal to close by end of March 2012.
Meanwhile, as the company worked with its lenders to restructure its debt in the past few months, it also put its act together to substantially improve operations. It has posted net profit consecutively for the last three quarters. On a cumulative basis, it reported a net profit of about Rs 500 crore including about Rs 190 crore for the quarter ended June 2011.
While the sale of the profitable nutrition business will also impact (lower) the company’s future profits, a reduction in debt (helped by the sale) along with internal accruals from remaining businesses should see Wockhardt’s net debt come down sharply over the next 2-3 years time from Rs 3,200 crore currently.
The Street clearly seems to have sensed this recovery and as a consequence, the stock, which was shunned earlier, has more than doubled over the last one year. It has risen from Rs 155 levels on August 12, 2010 to Rs 403 on Friday. The situation now seems to be a far cry from around four years ago when the pharma major went on an acquisition spree.
ONE TOO MANY
While Wockhardt had set its sights on reaching the top through the inorganic route, things did not turn out as anticipated. Since 1998, it has picked up eight companies, six of which were based in Europe. In the process, it paid about Rs 2,500 crore, two thirds of which were for two acquisitions—Pinewood Labs of Ireland in 2006 and Negma Labs of France in 2007. While it was competing with other pharma majors to expand its geographical footprint and increase its revenues, the aggressive acquisitions led to a piling up of debt.
LOW ON LIQUIDITY
From a debt of Rs 160 crore in 2000, (it had picked up Wallis Labs of the UK and Merind from the Tatas) till then, the sums it owed jumped over 25 times to an unmanageable Rs 4,235 crore at the end of 2008. Its net worth, however, had grown barely 5 times during this period. In addition to the debt, it had entered into derivative contracts which led to losses of over Rs 1,000 crore in 2009-10. The situation was compounded further by the global credit crisis which made it hard to raise additional funds.
While Wockhardt was not the only one to have made multiple acquisitions and entered into derivative contracts it could have done things better to increase cash flow from operations and debt management, while allowing more time to make its investments work.
A pharma consultant believes that all companies which had gone into Europe and the US had to learn the workings of the regulators and markets the hard way. “Companies including Wockhardt went into Europe without a proper understanding of the regulatory set up and compliance processes. Further, they failed to understand the cultural set up of these markets. It was not just a case of acquiring a company and transferring all the operational processes to India or its other units to save money. Some time had to be invested to understand the psyche of the regulators as well as their labour practices,” he says. Another issue for the management was that key people left the company during a critical period and it became difficult to replace the management vacuum so soon.
While it had operational issues to deal with, time was running out as creditors were knocking on its doors to recover their dues. With some of the loans and foreign currency convertible bonds (FCCBs) to the tune of Rs 400 crore falling due, it was forced to approach its lenders for a corporate debt restructuring (CDR) programme. Though banks to which it owed a large chunk of the over Rs 3,500 crore agreed to relax the payment terms, the arrangement came with its own set of conditions. One of which was a commitment to sell its non-core assets.
The company started to dispose off some of its assets such as the animal healthcare business, German operations and nutrition business. While the first two businesses fetched it about Rs 290 crore, it was the sale of its nutrition business in July 2009 to Abbott for Rs 650 crore which was key to raising enough cash to pay a large part of the debt and improve cash flow. The sale, however, got entangled in the courts. The reason: The company’s foreign unsecured lenders (FCCB holders) refused to give up on the proceeds from the sale in favour of secured lenders. This forced Wockhardt to call off the sale seven months on in January 2010. Although Wockhardt has settled with some of the bond holders, a few (whom the company owes $67 million or about Rs 300 crore) are not willing to take a cut.
The key from here on thus is the attitude of the foreign creditors who are refusing to budge. Even if one assumes that the company will end up paying their dues in full, it shouldn’t make a significant difference to its overall debt.
While the court case could take some time to sort out, with the company making money and its asset sale programme close to an end, Khorakhiwala and his two sons at the helm can now look forward to steering the ship in much calmer waters.