That Wockhardt Ltd wants to sell its nutrition business is known for months now. The consideration, too, was quite close to that mentioned in news reports. The lack of a surprise may have been a reason for its share price falling by about 4% on Wednesday.
The deal could lower Wockhardt’s debt to more reasonable levels, but a bigger imponderable for shareholders is whether the transaction will finally go through. About two years ago, the company had agreed to sell this same business to Abbott Laboratories, but some of Wockhardt’s creditors scuttled the deal, as they were dissatisfied with the settlement offered to them.
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That saga continues. In March, trustees to the foreign currency convertible bonds (FCCBs) issued by the company filed a winding up petition. Wockhardt got a stay on that petition, but was asked to deposit Rs 115 crore with the court.
Neither company has said anything about how the deal will overcome the litigation overhang, except that it is subject to conditions and approvals. Danone SA knows the fate Abbott suffered, and is also paying considerably more. It will pay €250 million (around Rs 1,575 crore) to buy the nutrition-related brands and assets. Two years ago, Abbott was to pay about Rs 630 crore at the then prevailing exchange rates.
It makes the prospects of a settlement with Wockhardt’s bondholders a little brighter. But the process may take time, as it needs to get on board existing lenders, holders of FCCBs and seek closure of legal proceedings as well. This is not a done deal by any means.
Assuming that the deal goes through, what does it mean for Wockhardt? It will get a portion of the proceeds, with some going to Carol Info Services Ltd, which owns the factories that supply the nutrition products, and possibly some other group companies, too. The exact amount will become known later.
Wockhardt had loans of about Rs 4,016 crore on 30 September, and its debt-to-equity ratio was 4.6. The current sale will help it lower this debt burden significantly. The companywill lose the lucrative nutrition business, but will get more breathing room, so it can drive growth in its pharmaceutical business.
In recent quarters, Wockhardt’s US and Indian generics businesses (accounting for 45% of the total sales) have contributed significantly to sales growth. Overall profitability, too, has improved. Closing this deal with Danone is not only crucial to reassure Wockhardt’s investors, but also to remove litigation-related uncertainty and lower its debt burden to more manageable levels.
Graphics by: Yogesh Kumar/Mint
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