Mumbai, Feb 25: The Rs 400-crore Wockhardt has bought out the Tatas' 50 per cent stake in Merind for Rs 47 crore. The takeover will catapult Wockhardt to the ninth position from its current 19th rank in terms of retail drugs offtake, taking it ahead of several leading multinationals like Novartis, SmithKline and Pfizer.Wockhardt edged out a host of other suitors (including Glaxo) to take over Merind by making what has been termed by Merind chairman AH Tobaccowala as a "very generous offer". Wockhardt will shell out Rs 260 a share for the Tata holding in Merind and will further make an open offer to all the remaining Merind shareholders at the same price. The offer price of Rs 260 per share represents a premium of over 40 per cent on the current Merind stock price.
Addressing a press conference, Wockhardt chairman and managing director Habil F Khorakiwala said the SEBI takeover regulations only required the acquirer to purchase up to a maximum of 20 per cent of the remaining shares. However, Wockhardt haddecided to buy the remaining 50 per cent shares outstanding to enhance shareholder value and give Merind's minority shareholders a fair deal. "This will allow Wockhardt to consolidate the entire sales and profits of Merind, thereby ensuring value creation and quick and adequate return on investment to Wockhardt shareholders."
Leading investment banker JM Financial had represented Wockhardt in the deal. While Tata Sons, its investment companies and Voltas hold a 50 per cent stake in Merind, Tata Mutual Fund holds another 4 per cent. The financial institutions and FIIs hold 15 per cent and 3 per cent respectively, while the remaining 28 per cent of the equity capital is held by the public.
If the offer to Merind shareholders draws a response of over 90 per cent, Wockhardt has the option of delisting the company. If the current offer price does not evoke a 90 per cent response, Wockhardt would consider making a second offer subsequently, failing which shareholders who do not wish to avail themselves of theoffer can continue to hold shares in Merind as a private firm.
If all Merind shareholders respond to Wockhardt's offer at Rs 260 a share, the total outgo for Wockhardt will be Rs 94 crore. The acquisition cost is being funded partly by debt and partly by internal accruals. The 100 per cent acquisition, if successful, will leave Wockhardt with around Rs 100 crore in its brand-cum-company acquisition kitty. The company had kept aside Rs 200 crore for acquisitions, of which Rs 94 crore will be used for Merind.
The company has also been looking at purchases abroad. It recently acquired 100 per cent equity in the UK-based Wallis Laboratories for $5 million.The Merind acquisition also brings with it a subsidiary, Tata Pharma, which registered a sales turnover of Rs 52 crore as on March 31, 1997. While Merind holds a 74 per cent stake in Tata Pharma, the remaining 26 per cent will be shortly acquired by it from Lakme as per an earlier understanding.
While the entire Merind board is expected to resign on thecompletion of the acquisition by June this year, key top management officials, including Merind president HJ Tavaria, are expected to be retained by Wockhardt.
The new Wockhardt-Merind combine will have a total employee strength of 3,900, a field strength of 1,250 and an increased therapeutic coverage of 42 per cent of the drug market from 29 per cent now. Though Khorakiwala refused to comment on any possible rationalisation measures, analysts say that the new management would examine ways to trim flab.
INSIGHT -- an overpriced offer for a scrip that quoted at a P/E of 10 till recently
The Merind purchase will increase the product coverage of Wockhardt from 29 to 42 per cent of the therapeutics range, while allowing the Tatas to opt out of non-core areas. With hardly any product overlap, the takeover makes a lot of sense for Wockhardt.
But the buyout offer looks overpriced and hugely beneficial to Merind's shareholders at a P/E of 22 times 1996-97 earnings.
Merind's shareholdersare unlikely to see such a price again. Before speculation about Wockhardt's buyout surfaced, Merind's P/E was just 10. Wockhardt is investing Rs 47 crore (and an additional amount for the balance 50 per cent, if the open offer is accepted) in acquiring the company. The option thereafter will be to either retain the company as a 100 per cent subsidiary or merge it with itself.
Owing to the asset-acquisition spree that Wockhardt has been on, the return on capital (ROC) has been very shabby at 11 per cent, despite being in a high margin business (19 per cent).
In Merind's case, lower margins (8.5 per cent) have been offset by a higher asset turnover, yielding a better return on capital of 15 per cent. To that extent, a merger with Merind could see Wockhardt's returns improve.
But that is only in the event of a merger. If there isn't one, shareholders may not benefit much. Even if payout is doubled the yield on total investment will be just 3 per cent.
A generous offer: Tobaccowala
Merindchairman and director on the Wockhardt board, AH Tobaccowala, speaking on behalf of the House of Tatas, said that "the Wockhardt offer, at the moment, represents a generous one. But in the long run, Merind will fully justify the price."
Terming Wockhardt's offer as more than acceptable, he said that Wockhardt had requested the Tatas to accept a lower price so that the same offer price could be extended to all Merind shareholders. But, he added, this was a special case, and it did not mean that all possible other divestments by the Tatas would be done in the same way.
Reiterating his faith in Merind's potential, he said, "It's not that we had any doubt on Merind's growth, but over a long period it was best to be associated with a larger company with a global presence. Given the Khorakiwala family's association with fairness of dealings, market savvy and community consciousness, we found their offer acceptable."
Copyright(c)1998 Indian Express Newspapers (Bombay) Ltd.
