Tuesday, March 27, 2007

Shall we hatch this ?

What could be the next move for a PE firm in India ? It got me thinking…! Without having to storm my brain too much, it just occured to me. A buyout…there are quite a few candidates that come to my mind.
What would it look like if a PE firm takes Wockhardt Ltd. private, add significant strategic value, impute explosive growth and then take it back public to make a killing in the process for all stakeholders ?

With that, lets take a look at this company that could sustain an interest payment and debt load required to take it private. I think it is ripe for a buyout by a mid-sized PE firm, and therefore, ripe for the purchase by value oriented equity investors.

Wockhardt [ source : Annual Report 2005 ]
[ Full disclosure - Neither I nor my close relatives and to the best of my knowledge any of my business associates have any shareholding or other interest in this company as of now. ]

It's amazing how Wockhardt, the Indian pharma player has created an integrated global business model with state of art R&D, manufacturing facilities and differentiated marketing strategy during this most difficult year for Pharmaceutical industry which terribly underperformed every stock index. The company is banking on billions of US $ worth critical drugs especially in US and Europe coming off patent in the near future. During the year, its consolidated revenue grew 12.82% to $ 321 MM and PAT at $ 58.43 MM grew by 20.42%.

While writing this now, I have also read the company has acquired Pinewood, the largest generic Company in Ireland helping it achieve a wider wingspan in Europe spread over Germany, UK and Ireland which geography accounts for more than 40% of its revenue growth.

Wockhardt generated $ 39.61 MM in cash from operations in 2005 and is likely to improve that number this year. The company's equity market cap ( as of 03/27/06) is $ 928 MM, with a net cash balance (as of Dec.05) of about $147 MM.

About 73.73% of the stock is held by the founders and the rest of 26.27% is held between Foreign and domestic institutional investors (15.72% ) and public investors ( 10.55%). Currently the stock is quoting at $ 8.48 ( Rs.373.30) at a P/E of 19.8 times. Let’s assume a PE firm offers to buyout the company at a 30% premium to market price ( allowing for bidding frenzy) at $ 11.02 (Rs.485.29) at a P/E of 25.74 times on current earnings. The total acquisition bill would be about $ 1.2 billion.

At a 7% interest rate, the interest payments on $ 1.205 billion ( assuming total buyout ) would be $ 84.35 MM, that is just 57% of $147 MM, which is what the company has consistently generated over the last few years. Since Wockhardt has significant net current asset cushion in its Balance Sheet and only needs about $ 125 MM in maintenance capital expenditures, it's a perfect buyout candidate. With some cost cuts and knocked down expenses, the company could easily generate enough cash to continue operating smoothly.

In fact, it presents an ideal case for a leveraged management buyout with Mr.Habil Khorakiwala and his team in tact, retained for its enormous savvy and experience over the industry besides the international expertise available from its European acquisitions in the recent past. If we can infuse a significant load of external strategic muscle as would help fuel the global ambitions of the company, we've got a multibagger in as much as 3 -5 years as could be relisted anywhere in the world. If the PE firm has a good pharma portfolio in sync with Wockhardt credentials, ah...!

Asking for orders now. [ One of the biggest secrets to dating hot women is having the guts to ask them out in the first place. That’s right. You’ve got to be a man of action, because all of the plotting and planning and dreaming in the world is going to get you nowhere if you don't dare to ask her out :-) ].
Alright Mr.Private Equity, shall we call this a mandate ?

1 comment:

rubicon said...

decent post but strangely no comments on your blog. is it not done in india?