Executive Summary

Wockhardt: Debt-ridden and Market-beaten

"Some debts are fun when you are acquiring them, but none are fun when you set
about retiring them” ~ Ogden Nash

Group 2
Ashwin S PGP-09-017

Ishita Krishna PGP-09-124

Priyanka Priyadarshini PGP-09-149

Shyam Raghavan PGP-09-165

Tanmay Jain PGP-09-171

Vardhman Chand Rai PGP-09-175

The Company

Wockhardt is a global pharmaceutical and biotechnology company that has grown by leveraging on two powerful trends
impacting the world of medicine - globalisation and biotechnology.

Wockhardt has a presence in world’s leading markets and most part of its revenues comes from Europe and the United
States. Wockhardt’s market presence covers formulations, biopharmaceuticals, nutrition products, vaccines and active
pharmaceutical ingredients (APIs).

The company has its headquarters in India and has:

• 14 manufacturing plants in India, UK, Ireland, France and US

• Subsidiaries in US, UK, Ireland, and France

• Marketing offices in Africa, Russia, Central and South East Asia

The company is listed on the Bombay Stock Exchange and the National Stock Exchange in India and in the
Luxembourg Stock Exchange.

Source: www.wockhardt.com

Growth Trend

Starting from 2004, the company started its inorganic growth by acquiring companies in foreign markets, the major
ones of which are:

• UK firm CP Pharmaceuticals in July,2003 for about Rs. 82.5 crores – internal accruals

• German firm Esparma in May,2004 for Rs. 49 crores – internal accruals

• Irish firm Pinewood Laboratories in October, 2006 for Rs. 664 crores – all cash

• Dumex India Pvt. Ltd. In 2006 for Rs. 93 crores -

• French firm Negma Labs in March, 2007 for Rs. 1044 crores – all cash

• US firm Morton Grove Pharmaceuticals for Rs. 146 crores -

Total funds required to acquire these companies: approximately Rs. 2100 crores

Why these acquisitions?

1. To gain access to the generic drug segment for which inorganic growth was necessary

2. To gain access to the markets of European Union in lines with their policy and boosting Wockhardt’s
International brand equity

3. The company already were exporting their pharmaceutical products to these markets so gaining a foothold in
these markets would mean cost savings

4. Acquisitions of intellectual property and technological capabilities

5. To achieve the corporate objective of $ 1 billion turnover by 2009

How did the company fund the acquisitions?

1. Through internal accruals: Reserves

 2. By paying cash

3. By raising money via the FCCB route

Source: www.moneycontrol.com

What are Foreign Currency Convertible Bonds?

A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money
being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt
and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give
the bondholder the option to convert the bond into stock.

Attractive to both issuers and investors

These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed
payments on the bond and are also able to take advantage of any large price appreciation in the company's stock.
(Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when
the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the
coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

Wockhardt’s funding decision

• Board meeting of Q2, 2004 - Wockhardt launched its maiden FCCB issue of US $ 110 Mn

• 1,08,500 number of 5 year, zero coupon bonds at FV $1000 with a yield of 5.25 per cent compounded semi-
annually were issued with an option of convertibility of each bond into 94.265 fully paid equity shares with par
value of Rs.5 (Rs.5 * 94.265= Rs. 486.075)

• Conversion price amounts to Rs. 486

Source: Notes to Accounts of Wockhardt Annual Report FY’08

Seemingly Attractive Proposition

• Stock market was bullish and was looking to soar higher and this meant that the investors would readily
convert the FCCBs to shares as the expected share price five years down the line was more than the conversion
price (Rs.486)

• Rupee was going strong against the dollar in early 2004 and was appreciating gradually to Rs.45/share. All
transactions in foreign currency shall help them invest in the forex market.

• FCCBs have always been an easy route to fund owing to their low coupon rates and higher conversion price.

A Risky Proposition

• FCCBs were redeemable on maturity date at 129.58% of the principal amount, if not converted or redeemed
earlier.
 • Exchange risk was always intrinsic to the bond issue and any major fluctuation could cause an impact in the
amount to be redeemed.

Need for a Corporate Debt Restructuring

• Rising Debt Equity ratio of Wockhardt from 2007-08

Dec Dec Dec Dec Dec

‘04 ‘05 ‘06 ‘07 ‘08
Debt/Equity
1.32 1.01 0.74 0.79 2.69
Ratio

What is Corporate Debt Restructuring (CDR)?

The reorganization of a company's outstanding obligations, often achieved by reducing the burden of the debts on the
company by decreasing the rates paid and increasing the time the company has to pay the obligation back. This allows a
company to increase its ability to meet the obligations. Also, some of the debt may be forgiven by creditors in exchange
for an equity position in the company.

This was necessary for Wockhardt in view of the adverse market conditions, liquidity constraints and debt burden.

Terms of Wockhardt’s CDR

Wockhardt had to approach a number of commercial banks led by ICICI bank for the approval of a Corporate Debt
Restructuring plan. The terms of the CDR plan were as follows

1. The bond holders were offered buyback at a 65% haircut to the conversion price. 40% of the bond holders
agreed to this option

2. Wockhardt has also given an option to exchange the bonds for preference shares that are partly convertible
in 2015 and partly redeemable in 2018.
Twist in the tale- Wockhardt divesting its businesses

 Wockhardt has been selling non-core assets to raise money to reduce its mountain of debt totaling Rs 3,700 crore

 Animal Healthcare Business was sold to French company Ventoquinol for 170 crore

 German Esparma was sold to Lindopharm for 120 crore

 After these divestments, Wockhardt was planning to sell its nutritionals businesses to Abbott Laboratories, which
included two major brands Farex and Protinex of its prior acquisition Dumex India Pvt. Ltd., to Abbott
Laboratories Inc for 650 crore. This deal would have generated enough funds to pay off the FCCB holders but
foreign lenders (QVT) took Wockhardt to court claiming that the CDR process was one-sided and that they were
not consulted. They filed a winding up petition on Wockhardt if they went ahead with the Abbott deal. The deal fell
through because of this.

 In August 2009, Wockhardt also sold 10 hospitals (including two greenfield under construction) to Fortis
Healthcare for Rs 909 crore, of which Rs.500 crore was used to repay the debt and 400 crore for expansion plans

Learnings

 Any bond issuer should maintain a redemption reserve in the event of investor’s claims

 Embedded call option in the bonds gives the issuer the right to call them back anytime

 A company should have a proper risk management policy to manage Forex risk and derivative risk exposure