What may be legitimate, need not always be fair. Wockhardt Ltd’s minority shareholders may ponder this aspect of corporate life, as they peruse a postal ballot form asking them to approve the sale of their company’s nutrition business to Danone SA.
The deal was announced earlier this month, but the break-up was not known. Wockhardt would share the proceeds with a listed group company, Carol Info Services Ltd, which does contract manufacturing for the nutrition business.
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In August 2009, Wockhardt had similarly sought shareholder approval to sell this business to Abbott Laboratories, but the transaction had failed. The consideration was about Rs600 crore, with Wockhardt getting Rs282 crore for the business, and Carol getting Rs50 crore for the contract manufacturing operation and a factory at Lalru in Punjab. The remaining Rs268 crore, it is assumed, would have accrued to Wockhardt EU Operations (Swiss) AG and Vinton Healthcare Ltd, Wockhardt’s subsidiaries. This consideration was for the brands Protinex and Farex, and a new factory being set up at Jagraon in Punjab, which belonged to the subsidiaries. The promoters had signed a non-compete agreement, so a fee may have been due to them as well.
Now, Danone is paying around Rs1,600 crore, or 2.7 times Abbott’s price. Wockhardt will get Rs640 crore, while Wockhardt EU will get Rs650 crore. The Jagraon facility will not be sold to Danone; and Wockhardt, and not its promoters, will sign a non-compete agreement.
But the surprise factor is that Rs320 crore will go to Carol, 6.4 times what it was getting in the first transaction. Wockhardt itself will get only 2.3 times more. Brands and a business—such as marketing and distribution strengths—should get a higher valuation than a factory or a contract manufacturing operation.
In fiscal 2010, Carol had earned Rs14 crore from processing charges (it also gets rental income from commercial properties it owns). Its interim balance sheet as of September does not show any addition to fixed assets to justify the increase in its valuation. The Khorakiwala family, which owns a 73.6% stake in Wockhardt, owns a 63.7% stake in Carol, and has taken shareholder approval to delist Carol. Wockhardt’s lenders will ensure the proceeds accruing to it are used to repay debt. A leaner balance sheet will benefit shareholders, too. Wockhardt EU, too, will lower overseas borrowings with the money. But if Wockhardt had got more, instead of Carol, both its lenders and minority shareholders would have been happier.
If the promoters had to take their stake in Carol to 100%, they would have to fork out about Rs290 crore at Thursday’s closing price. The sale to Danone will leave a little more than that in its bank account, not accounting for taxes.
Graphic by Ahmed Raza Khan/Mint
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