Wockhardt falls on winding-up petition; compromise best bet

Wockhardt falls on winding-up petition; compromise best bet

WockhardtLtd’s investors are understandably nervous after a winding-up petition against the company was admitted by the Bombay high court. The firm’s stock has declined by about 9% since Friday’s open, while the Bombay Stock Exchange’s (BSE) healthcare index has slipped by about 1% in the same period.

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The issue pertains to the recast of Wockhardt’s loans under a corporate debt restructuring (CDR) exercise approved in July 2009. It covered various loans, including foreign currency convertible bonds (FCCBs) with a face value of $110 million (around Rs500 crore today). Through the CDR package, Wockhardt had offered FCCB holders preference shares equivalent to the redemption value, with half the amount convertible into equity shares. Not all holders were interested, apparently. In September, the firm took shareholder approval for a fresh issue of FCCBs to bondholders with $74 million worth of bonds. But that, too, appears to have failed to appease creditors, who filed for liquidation.

Wockhardt’s fate affects not only shareholders, but also other creditors, mostly banks, which have accepted the CDR package. They hold a major chunk of the firm’s Rs4,000 crore outstanding loans. The best outcome for equity investors would be for Wockhardt, its existing creditors and the litigants to reach a compromise. Equity investors, who were hit hard by the firm’s financial woes, have seen better days in recent months. The share price has risen from a low of Rs115 in May to Rs322 now, having touched a high of Rs426 in November. This is on the back of better results.

In the nine months ended December, sales are up 1.7% and operating profit has risen 33% over the year-ago period. Excluding exceptional items, the company would have posted a decent profit.

The firm’s balance sheet is not very healthy, with loans at Rs4,018 crore and net worth at just Rs655 crore. It needs to lower debt by selling some of its businesses. The sale of its nutrition business to Abbott had to be terminated because of litigation-related uncertainty. Laboratories

Wockhardt plans to appeal the court’s decision. A quick resolution to the current litigation will be a positive in the longer run, even if it means a cash outflow or equity dilution. The alternative presents an unpleasant outcome for the firm and its minority shareholders.

Graphic by Sandeep Bhatnagar/Mint

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