Mumbai: Last year, Habil Fakhruddin Khorakiwala, who controls India’s sixth largest publicly traded drug maker by sales, Wockhardt Ltd, pulled a Rs700 crore initial public offering for Wockhardt Hospitals Ltd, the country’s second largest hospital chain.
Now, fighting a severe liquidity crunch, he has not only pledged 43.11% of his stake in Wockhardt with Infrastructure Leasing and Financial Services Ltd (IL&FS) and IDBI Bank Ltd to raise money, but also the 150,000 sq. ft company headquarters at Mumbai’s Bandra Kurla Complex.
Two investment bankers Mint spoke with say the 64-year-old Harvard alumnus has pledged his entire stake in the unlisted Wockhardt Hospitals, too, but Khorakiwala denies this.
Hard times: Khorakiwala says his firm is not leveraged enough and can borrow more as it has assets that haven’t been offered as collateral. Madhu Kapparath / Mint
Mint spoke with him on Tuesday, only after he had informed the stock exchanges of details of his pledged shares. An email was sent last Friday and that was followed up with more emails many phone calls.
India’s capital market regulator, Securities and Exchange Board of India, or Sebi, wants all listed firms to make such disclosures.
Power went off at Wockhardt building, stationed between the National Stock Exchange and Sebi headquarters. Sitting in backup lighting in his ninth-floor office, Khorakiwala said the building is pledged to lenders, but declined to give details. The building is owned by unlisted Khorakiwala Holdings and Investments Pvt. Ltd that owns 63% in Wockhardt.
Khorakiwala has borrowed around Rs320 crore from IL&FS and IDBI to “clean up all other previous loans”. Wockhardt’s shares slumped 74% in 2008 and this year so far, they have fallen about 12%.
Investment bankers say he also pledged shares earlier to borrow money and the lenders securitized the loan among others, including a few mutual funds. They even say one such fund house actually sold some shares, but Khorakiwala said he is not aware of any such sale.
“The inherent risk in loan against share transactions (LAS) exposes LAS-based securitizations to cliff risk,” Fitch Ratings Ltd said in a recent report on structured finance.
Khorakiwala, however, continues to face the risk of such events if the share prices keep on dropping, as he would need to bring in more shares as collateral. Promoters’ holding in the company is around 73%.
Wockhardt has to repay short-term loans of about $110 million (Rs536.8 crore now) on its foreign currency convertible bonds and about $31 million interest cost, totalling upwards of Rs700 crore. The bonds will convert to equity in September only if its share price, now quoting Rs96.60, rises five times in the next six months. The shares are traded on bourses in India and Luxembourg, while its bonds are traded in Hong Kong. The firm also posted heavy mark to market, or MTM, loss on foreign loans and exotic derivatives in 2008. MTM is an accounting practice of valuing a financial asset on its market value and not the cost at which it is bought.
Wockhardt’s total debt is about Rs2,900 crore and the debt to equity ratio, a key to a firm’s financial health, is relatively high at 2.28:1.
Khorakiwala said his firm is not leveraged enough and can even borrow more as it has assets that have not been offered as collateral to any bank so far. He is negotiating with State Bank of India and ICICI Bank Ltd for fresh loans offering these assets as collaterals.
The firm had earlier mandated the Indian investment banking arm of Swiss bank UBS AG to help it sell assets. Unable to find takers for recently acquired global assets, besides non-core assets in India, the mandate has been recently revised. Investment bankers say Khorakiwala is now looking for strategic sale in Wockhardt and the group may recast the firm by creating a new entity solely for domestic business.
Wockhardt’s foreign operations in Europe and the US account for two-thirds of its revenues. Khorakiwala denied this but said the firm gave mandate to an investment bank last month to look for buyers for its non-core assets.
“Foreign strategic players are unlikely to buy minority stake in an Indian drug firm,” said a senior executive at the corporate advisory unit of a large foreign bank in India on condition of anonymity.
To be sure, there are many large global pharma companies looking to expand in India through acquisitions, he said. Mid-2008, Japanese pharmaceutical firm Daiichi Sankyo Co. Ltd bought India’s largest drug maker Ranbaxy Laboratories Ltd for $4.6 billion.
The strong consolidation in global pharma industry is a huge positive factor for Wockhardt and Khorakiwala, said an investment banker who was adviser to Wockhardt Hospitals’ failed IPO in early 2008. He also declined being named.
Early in January, the world’s largest drug maker Pfizer Inc. struck a blockbuster $68 billion deal with its US rival Wyeth. On 8 February, The Wall Street Journal reported that large global firms GlaxoSmithKline Plc. and Sanofi-Aventus SA are exploring a deal with Indian drug maker Piramal Healthcare Ltd.
Investment bankers say since only large multinationals are keen to expand in India and they have large capacity in most part of Europe, Wockhardt may have to restructure businesses to make itself attractive for such buyers.
With many short-term obligations to meet, both at personal and the company level, Khorakiwala may finally succumb to the market reality, just as he did in early 2008— first cutting the sale price of the IPO and then scrapping the float of his hospital chain.