Mumbai: A group of investors, led by New York-based QVT Financial Lp, is planning to block troubled Indian drug maker Wockhardt Ltd’s Rs620 crore nutrition business divestment deal with US multinational Abbott Laboratories Inc. and any other fresh asset sale till all issues relating to its foreign currency convertible bonds (FCCBs) are resolved.
Wockhardt had sold $110 million (Rs500 crore today) worth FCCBs in 2004 and these investors bought 40% of those bonds.
The $9 billion hedge fund QVT is well known for investor activism.
On a previous occasion, it stalled a corporate decision skewed heavily in favour of the promoters of Hirco Plc, a Hiranandani group company listed on London’s Alternative Investment Market. This merger plan with the Hiranandani group’s holding companies was unfriendly to Hirco’s minority shareholders, diluting their voting power.
The hedge fund, along with a few other investors in FCCBs, has filed a winding up petition in the Bombay high court after rejecting Wockhardt’s proposal that envisaged a significant loss to the bondholders.
As per a corporate debt recast, or CDR plan, approved by Wockhardt’s lenders, the company would buy back the bonds at a 65% discount or convert them into equity shares by 2015.
“Wockhardt offered two restructuring options to bondholders and both were rejected as they were totally unacceptable,” said a spokesman for the bondholders, who requested anonymity.
Investors in FCCBs can block any plan of the company that affects them, provided they have the backing of 25% of bondholders in value terms. In this case, QVT has the support of 40% of the bondholders.
The bondholders’ group spokesman told Mint on Wednesday, “We have blocked the nutrition business deal of Wockhardt and it cannot complete it without informing us.”
“In its last hearing on the winding up petition filed by the bondholders, the Bombay high court in December instructed the company to keep the court informed at least three days prior to signing any deal to sell any asset,” said a lawyer familiar with the matter.
This will give the petitioners an opportunity to stall any of Wockhardt’s deals that are in the pipeline, the bondholders’ group spokesman claimed.
Mint was not present at the court hearing.
Wockhardt, which had sold three of its businesses, including a pharmaceutical business in Germany, its entire animal health business and nutrition business in India and abroad through a slew of deals from June to October 2009, as part of CDR, is also in talks with a few multinational companies, including the world’s largest drug maker by sales Pfizer Inc. for potential divestments of part of its non-core businesses.
In an email response to Mint’s query, a Wockhardt spokesman said that according to its lawyers, no order has been passed by the Bombay high court restraining the company from the sale of its nutrition business to Abbott.
“All matters are sub judice and are proposed to be heard on 15 January, where divestment of the nutrition business will also be argued among other legal points,” he wrote in the email.
The Wockhardt spokesman added that the divestment of the nutrition business has already been approved by CDR.
The Wockhardt spokesman also said, “We would also unequivocally state we are currently not in any discussions with any company for selling any of our assets. As per the CDR package, Wockhardt was required to divest its non-core business to the tune of Rs730 crore over the next six years. We have already completed/in the process of completing divestment of Rs680 crore within two–three months of the CDR package and well ahead of the requirements.”
A Wockhardt executive, who declined to be named, mentioned that in a similar winding-up case, filed by a lender, the court had directed the company to inform it in advance on any asset sales.
An email sent to Abbott Laboratories in the US and its Indian subsidiary did not elicit any response.
Completion of the divestment transaction with Abbott is important for Wockhardt as it is the largest deal that it could strike after its lenders approved the recast plan.
QVT is a privately-owned hedge fund sponsor that provides its services to pooled investment vehicles. It invests in public equity, debt and alternative investment markets across the world. The fund has invested around $1 billion in Indian companies, the spokesman said.
Along with a group of investors, QVT holds $60 million of the $110 million FCCBs raised by Wockhardt for overseas acquisitions. The bonds carried a zero interest coupon with a 6% yield on maturity. This means that Wockhardt had to repay about $140 million to its bondholders by October 2009, when the bonds expire, unless the investors decided to convert the bonds into shares at Rs486 a share.
The conversion rate became meaningless as Wockhardt’s stock price was struggling at around Rs182 in October 2009 after the markets re-rated the company, following a string of setbacks that it faced, including Rs581 crore mark-to-market and foreign exchange derivatives losses.
Mark-to-market is an accounting practice of valuing a financial asset in accordance with its market price and not the cost at which it is bought.
The bondholders proposed to convert the bonds into shares at Rs210 a piece, but Wockhardt rejected the proposal and this led the bondholders to move the court to protect their interests.
Wockhardt shares rose 1.89% to close at Rs185.75 on the Bombay Stock Exchange on Thursday after the company announced late on Wednesday that the US Food and Drug Administration has approved its off-patent broad spectrum infection drug Levofloxacin for the American market.
This drug, which generated $1.6 billion in sales last year, is currently marketed by Johnson and Johnson Inc. under its brand Levaquin.
Wockhardt will launch the product immediately after the original patent expires in 2011.
Levofloxacin is a widely used antibacterial drug and belongs to the fluoroquinolone group.
Wockhardt shares had dropped to their lifetime low of Rs67.5 each in March 2009, and since then they have gained 175%.