It is fascinating to read success stories of companies which
grow and become very large companies in a short period of time. While these
companies certainly have a potential to grow even further, at times this speed
of growth becomes unmanageable and leads to their downfall.
Wockhardt Ltd. is a peculiar case. It was founded by Dr. Habil
Khorakiwala in early 1960’s and was incorporated in 1999 as Wockhardt Ltd. The
company is a pharmaceutical and biotechnology company headquartered in Mumbai,
India. The company has 12 manufacturing plants spread across India, UK,
Ireland, France and US. It produces formulations, biopharmaceuticals, vaccines
and active pharmaceutical ingredients (APIs).
 |
| Mr. HABIL KHORAKIWALA |
From 1997 to 2007, the company acquired 7 companies:-
·
Wallis Laboratory, UK
(1998)
·
Merind, India (1998)
·
CP Pharmaceuticals, UK
(2003)
·
Espharma GmbH, Germany
(2004)
·
Dumex India
(2006)
·
Pinewood Laboratory,
Ireland (2006)
·
Negma, France (2007)
These acquisitions required funds and due to easy availability
of funds at low interest rates, the company resorted to debt financing for
these acquisitions. The net debt increased from Rs. 1559.41 mn in 2004 to Rs.
40,229.64 mn which is around 25.8 times over a period of just 4 years. This
meant increased finance costs and high risk. Debt was raised as a mix of
secured loans and unsecured loans including the FCCBs.
These loans were not a problem till 2008 as the company
witnessed a CAGR of 30% in sales from 2004 to 2008. The company was expanding
at an unprecedented rate generating large revenues and high value for its
shareholders. With most of the acquisitions turning successful, the company
entered into complex currency transactions to make quick gains and supplement
its profits from daily operations. Everything worked as the management planned
but like most of the corporates, even it could not see the 2008-financial
crisis coming and were caught off guard. The company incurred a loss of Rs. 600
crores on forex transactions which wiped off profits of number of years. Even
after incurring this huge loss, the company had the potential (because of
robust operations) to storm out of the losses without doing much damage to
itself, but the problems became unmanageable when the FCCBs (Foreign Currency
Convertible Bondholders) refused to convert their bonds into equity shares and
demanded repayment in cash. The quantum of their demand being US$110mn. The
management was caught from all sides as it had no bandwidth to raise more debt
to honour FCCBs as the company was already reeling under high debt and neither
any scope to issue equity shares as the stock markets were badly hurt due to
financial crisis. The loss on forex has dried up its reserves and the company
was under serious liquidity problems. It was already becoming hard for the
company to honour its rising interest charges on high debt due to drop in
topline due to fall in demand from European and US markets. Debt service and
that too of US 110$ mn was the last thing the company was prepared for.
Ultimately the company defaulted on its payment to FCCBs and went in for
Corporate Debt Restructuring led by ICICI Bank. Most of the creditors agreed to
the CDR plan but FCCBs argued that CDR was favouring domestic banks and was
structured against FCCB holders. Thus, they filed a winding up petition in
Bombay High Court and asked the court to appoint a liquidator. The court
admitted the winding up plea in an unprecedented decision. The promoters got a
stay on this plea from the court and promised to increase promoter shareholding
to payback the FCCBs.
Promoters
plan, post 2008 financial crisis, was to sell some of its assets and repay debt
by 2015. It sold its losing German subsidiary, Esparma, to Mova GmbH and the
animal health division to Vétoquinol, a French veterinary care company, for an
undisclosed amount in Jun, 2009. In Aug 2009, Wockhardt Ltd, sold 10 of the 17
hospitals it owned to New Delhi-based Fortis Healthcare for Rs 9090 mn. In
July, 2012 Wockhardt entered into an agreement with Danone for divestment of
its Nutrition Business for a consideration of Rs. 12800 mn, including its
wholly owned subsidiary.
 |
| Source: Company Annual Reports |
The net debt decreased substantially and by the end of FY
2012-2013, the company had Net Debt of Rs. 19,654.69 mn and had repaid the
entire amount of US 110$ mn to FCCBs. It had also exited CDR process in this
FY. Thus, the company raised the required fund which was used to repay the debt
and put back business on the right track. The company clocked sales of more
than $1 billion in FY 2013 which resulted in diluted EPS of Rs. 143.34, highest
in its lifetime.
 |
| Courtesy - livemint.com |
As
the analysts were amazed by the speed at which things took place right from exponential
growth of wockhardt from 1999 to 2008 to the 2008 financial
crisis where company was almost bankrupt followed by recovery when company
clocked more than $1bn sales; a letter arrived at the Wockhardt Corporate
HQ from USFDA signalling that the problems at Wockhardt were far from being
over.
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