US-based Avenue Capital, a hedge fund that focuses on distressed and undervalued debt and equity opportunities, is in an advanced stage of negotiations to pick up an equity stake in Delhi-based loss-making pharma company Morepen Laboratories. Sources indicated that Avenue Capital could pick up 15% stake for around Rs 80 crore, and the deal which is expected to be completed by the middle of this month.
The fund is offering Rs 20 per share of Morepen Labs, which works out to a 28% premium to Friday’s market price of Rs 15.6. However, it is about 40% higher than the share price when negotiations between the two began.
When contacted, Morepen Laboratories chairman and managing director Sushil Suri confirmed the development. He, however, refused to divulge details saying, “We cannot disclose the name of the investor.”
Sources close to the deal also said Avenue has the option to subscribe 5% more of the equity by way of warrants in the future. For this, they will have to make a down payment of 10% of the agreed price upfront, while the remaining will be paid up in 18-months. This will trigger off the mandatory requirement of an open offer.
Currently, Morepen’s equity base is of about 21.1 crore shares. If Avenue’s stake goes up to 20%, the number of shares will go up to 37.06 crore shares including the warrants made to promoters and investors. The company has issued 75 lakh shares or 3.43% to banks under a debt restructuring settlement at the same rate. This will result in a promoter holding of about 46%.
Morepen has recently announced that it has issued fresh capital of Rs 103 crore to banks and financial institutions, as part settlement under the Corporate Debt Restructuring Scheme (CDR).
The company had debt of Rs 757 crore out of which lenders for Rs 574 crore have opted for a one-time settlement of between 15% to 25% of their principal outstanding. Lenders for Rs 161 crore have opted for restructuring of the outstanding debt, of which Rs 72 crore will be serviceable at 8.25% per annum repayable in 7 years and Rs 64 crore will be zero coupon instrument payable in the 9th and 10th year.
On the issue of investor deposits that the company has been unable to repay, Mr Suri said that the settlement with the banks was the first step towards reviving the company. “Once company becomes debt free, we would raise capital to pay the depositors. We have already made settlements with the banks and arranging money to pay to them. We are making arrangement for settlement with fixed deposit holders,” he said.
The fund raising will help the company to substantially improve its capacity utilisation. Morepen is talking to MNC pharma companies in its attempts to secure long-term contract manufacturing. The company has set up a new facility for making paracetamol and currently manufactures 2,400 tpa of the drug which it plans to increase by the end of the year.
Avenue has already made a few investments in India in the past few years. It acquired 100% of GPI Textiles, a sick firm owned by the Mittals of the Ispat Group for Rs 200 crore in September 2006. It has recently picked up stake in the Rs 1,000-crore ‘Medicity’ project in Gurgaon, being promoted by the cardiologist-turned-entrepreneur, Naresh Trehan. It has also invested around $500m for a 26% stake in the Nikhil Gandhi-promoted SKIL Infrastructure.
Source: Economic Times