Wockhardt in talks with PE firms to raise $150-200 mn

Wockhardt in talks with PE firms to raise $150-200 mn

Mumbai: Wockhardt Ltd, the country’s sixth largest drug manufacturer by sales, is in talks with a few private equity (PE) players and strategic partners to raise around $150-200 million (Rs750-1,000 crore), said two people familiar with the development, who declined to be named because of confidentiality reasons.

A key reason for Wockhardt’s search is to deal with liabilities arising out of redemption of $110 million worth of foreign currency convertible bonds (FCCBs), which the company issued in 2004 at a conversion price of Rs486 per share.

As per the terms of the bonds, Wockhardt will need to pay out $142.5 million when the bonds become due in October.

The same people said Wockhardt has had one round of discussions with at least two PE firms over the past few weeks, and that an overseas drug maker has also shown an interest in possibly buying a strategic stake in the company.

While they declined to name the PE firms or the interested drug maker, these two persons said that the talks have hit some roadblocks because of Wockhardt’s expectations for a high valuation.

Also, the company has not yet mandated any bankers for the funding and the talks with the PE firms are currently on a bilateral basis and led by a team of Wockhardt’s senior managers, they said.

“Wockhardt is in the process of evaluating various options to raise additional funds, including equity participation. However, we are not evaluating a strategic partnership for equity," a spokesperson for the company said in response to an email query from Mint, while declining to elaborate.

The company’s share price of Rs93.10 on the National Stock Exchange on Friday is substantially lower than the conversion price of Rs486.

If instead of converting, the bondholders redeem the FCCBs, they will get a return of 29.58% on their investment thanks to the coupon rate of 5.25% (compounded semi-annually) on the bonds.

For investors to consider converting their bonds into shares, the Wockhardt scrip will have to be higher by at least 29.58% over the conversion price of Rs486.

In other words, Wockhardt shares need to rise by 576% from current levels—to Rs535.68 a share—for any prospect of the FCCBs converting into shares.

Hardly anyone expects a move of that size in Wockhardt’s shares in the next 11 months, by which time the bonds will mature.

On the flip side, the company’s plan to issue fresh shares to raise funds for its FCCB redemption will lead to considerably dilution in its equity.

Assuming that the company is able to raise equity at the current market price of Rs93.10 a share, that would involve an issue of as many as 76.6 million shares.

Wockhardt’s outstanding equity stands at 109.4 million shares currently, which means a fresh issue at current prices could dilute equity by as much as 70%.

If all shares are issued to third-party investors, the promoter stake would fall from the current level of 73.6% to 43.3%.

“If there is situation that a company needs to raise small fund by diluting a minority stake, they would prefer to go for a private equity deal as there is no apprehension of losing control to a strategic partner," says Chip Greene, partner and Asia head of US-based deal adviser The Parthenon Group, speaking in general and not about Wockhardt.

In the fiscal year 2008, the company’s cash flow from operations stood at Rs371 crore against ongoing capital expenditure of Rs336 crore, leaving cash of just Rs35 crore.

The company’s current debt is about Rs2,900 crore, compared to an equity base of Rs1,274 crore, or a debt-equity ratio of 2.28:1, making further debt financing harder to come by in a market already squeezed for credit.