Tuesday, July 2, 2013

Aanjaneya Lifecare FCCB conversion price reset-backdoor M&A?

With USA, UK, Japan, Chinese and other equity markets in a turmoil, it is unsurprising to see Indian markets in even more turmoil, with external volatility magnifying its inherent volatility. To avoid missing some interesting snippets among all the financial news 'noise', I read corporate announcements on a weekly basis. During one such read, I found that Aanjaneya Lifecare has proposed to reset the conversion price of its 5.44% USD40Mn bonds due 2018, from Rs 260 per share to Rs 55 per share(!). This works out to hardly a 10% premium over the existing share price of Rs 49.5. With a present market cap of Rs 68.81 Crores, the company's present capital structure is 13.9Mn shares. If the conversion option is fully exercised at Rs 55 per share and fixed exchange rate of 54.29, there would be an additional issue of 40Mn shares, or nearly 3x the existing share capital! The postal ballot notice can be read below

While trying to figure out the reason, I read the  Offering Circular FCCB which envisages the only adjustment contemplated to the conversion price was as per Clause 5.3 of the FCCB which stated that The Conversion Price of the Bonds will be reset downwards only if, on the Reset  Dates, the average of the Volume Weighted Average Price (VWAP) of 21 consecutive  Trading Days on BSE prior to and including any of the Reset Dates is lower than the  Conversion Price prevailing on that Reset Date. Maybe this was to safeguard against price manipulation on that date. However, even this came with the caveat that The Conversion Price will not be reset  below 90% of the Conversion Price prevailing on the relevant Reset Date. However, such Conversion Price will not be  reset below the floor price which is in turn defined as The minimum conversion price of  a convertible bond as calculated under the provisions of Press Note dated 21 November 2008 issued by Ministry of Finance,  Govt. of India

The promoter holding has steadily dipped from 60% to 40%, so maybe this was a way to use friendly FCCB bondholders to acquire control at bargain basement prices. After all, the company trades at P/BV of hardly 0.2 and with net debt of hardly 300 odd crores{Gross debt Liabilities around Rs 735 Crores less Cash Rs 212 Crores minus 50%*443 Crores of inventory+receivables=>approx 300Crs http://www.bseindia.com/xml-data/corpfiling/AttachHis/Aanjaneya_Lifecare_Ltd1_300513_Rst.pdf}, control could be got at Rs 600crs or so, for which you get a 500MTPA quinine plant at Mahad, a plant at AP and brand. Plus the management has won quality awards including one for its annual report. The name change to 'Dr Datson's Labs' seems reflective of management's R&D focus.  The auditors and merchant bankers are lesser known brands, nothing against that but does nothing to enhance investor confidence in price discovery of FCCB/fairness of FCCB allotment process.

The questions I have are
  1. Even if share price dropped to hardly 20% of earlier highs, is that a reason to say that price discovery done hardly 3 months ago, was improper? Does management not expect the stock price to recover to its old highs, even in 5years from now i.e 2018? Or did a bull cartel drive down the share price to force the company to reset conversion price, and hence acquire control? After all, unlike direct share purchase, FCCB holders identity is not disclosed.The auditors and merchant bankers are lesser known brands, nothing against that but does nothing to enhance investor confidence in price discovery of FCCB/fairness of FCCB allotment process.
  2. Institutional shareholders hold a majority voting stake with Religare Finvest 13.43%, Apex Drugs 9.44% and some brokerage firms 10.7%. Their collective vote of 33% odd percent will be crucial, given the management's vote at just 41%. Shareholding Mar13 Will institutional shareholders abstain/back management as always, or go ahead considering this is allotment at the existing market price only(almost)? This is an interesting question since if they decide to be activist, there can be plenty of trouble.
  3. In such cases where potential equity shares are 3x of existing capital, should repricing be
    allowed in the first place, without an open offer to the remaining shareholders? Will the SEBI ruling in case of IFCI apply where open offer is exempted http://www.moneycontrol.com/news/market-news/sebis-exemptionifcis-open-offer-what-is-it-about_763393.html

    Even if the share looks cheap, management does not think so, nor does the street otherwise an equity white knight should have come by now. Anyways, this is worthy of a case study in itself, and if successful/unchallenged, may write a new takeover strategy.


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  2. Very insightful indeed!! the present day status further reinforces your view!