Mumbai/ Delhi: Solrex Pharmaceuticals Co. raised its stake in Orchid Chemicals and Pharmaceuticals Ltd by 3.32% to 11.38%, fuelling speculation that it will soon mount a hostile takeover bid for the Chennai-based drug firm.
Going by the takeover code of the Indian capital market regulator, whenever a non-promoter shareholder’s stake crosses 15% in a company, the shareholder must make an open offer to acquire at least 20% of its paid-up capital.
Analysts tracking pharmaceutical industry said the latest development is clearly an indication that Solrex, possibly owned by the promoters of India’s largest drug maker by sales, Ranbaxy Laboratories Ltd, will make an open offer to Orchid shareholders after acquiring another 3.62% stake from the open market.
A consultant close to Ranbaxy, who does not want to be identified, said Solrex is indeed an entity within the Ranbaxy fold, formed last year. “It may have been formed by merging two of Ranbaxy’s non-active domestic trade subsidiaries.”
Ranbaxy’s annual report of 2006 that carries the latest available data on its subsidiaries shows that it had seven trade subsidiaries. The company follows January-December financial year and its 2007 annual report is not yet out.
A Ranbaxy spokesperson declined to comment whether two subsidiaries have been merged recently to create Solrex, a firm housed in the same building in New Delhi where Ranbaxy’s other trade subsidiaries are located.
“We don’t see it as a threat right now but we are not being complacent,” said Orchid spokesperson C. Ram. He agreed that the situation will get precarious if Solrex’s stake touches 15%—the threshold for triggering an open offer—but, said the Orchid management had various options to deal with a takeover attempt.
“The promoters have share warrants that can be converted into 5% equity till August of this year. We believe we have support from the institutional shareholders such as the domestic mutual funds and insurance companies. They have even reassured us verbally that they will stick with us,” said Ram. Orchid has been in talks with potential global investors for a possible stake sale and thwart any take over threats.
The promoters are not exploring the buy-back option to raise their stake as for that they would need to spend money. They were forced to shed 7.9% of their holding last month after two lenders had decided to sell pledged shares.
Orchid’s managing director K. Raghavendra Rao said any decision taken by it “would be made known to public” and declined further comment.
Malvinder M. Singh, Ranbaxy’s managing director, said he has no comments to offer on the development.
An analyst with a foreign brokerage, who doesn’t want to be identified, said the deal will benefit Ranbaxy both in terms of valuation as well as business. According to him, Orchid will be a strategic fit for Ranbaxy as it has been looking for a stronger presence in the antibiotic space. Orchid is a strong player in the antibiotic market both in India as well as abroad. “Since the Orchid valuation is low, there can’t be any better opportunity for Ranbaxy or any other buyer to look at this option,” he said.
Orchid has a promising pipeline of cephalosporins (a class of anitbiotics), about 25 abbreviated new drug approvals and a fairly strong presence in this segment in the US through front-end partnerships. Access to these, along with manufacturing plants, could make Ranbaxy the biggest player in the US in cephalosporins.
A Mumbai-based equity analyst, who did not wish to be named, said low promoter holding made Orchid vulnerable to takeover attempts. “The domestic drug industry is ripe for consolidation anyway as there are a number of smaller companies that create capacities but lack scale.”
The promoter group owns a little under 16% at Orchid, financial institutions 35.28% and corporate bodies 19.56%. The public holding in the firm is 22.11% and the rest is held by overseas investors, according to the Bombay Stock Exchange (BSE) website.
According to Securities and Exchange Board of India norms, the open-offer price should be at least the average of the daily high and low of the closing prices of the shares during two weeks preceding the date of the public announcement of the offer, or the average of the weekly high and low of the closing prices of the shares during the past 26 weeks—whichever is higher.
Solrex bought an 8.06% stake on 3 April through two block deals and followed it up by picking up another 3.33% on 7 April. On Tuesday, there were a number of bulk deals on the Orchid counter, and volumes were also high at more than 1.22 million shares on the National Stock Exchange (NSE). However, none of the bulk deals on NSE involved Solrex.
The stock price of Orchid rose 15.83% to close at Rs239.95 on BSE. The stock plummeted to new lows on 17 March and 18 March with foreign institutional investors dumping the stock in the open market. On 17 March it fell about 40% to close at Rs127.05. The selling continued unabated on 18 March when Cholamandalam DBS Finance Ltd and Macquarie Bank Ltd sold more than 2 million shares in the market, pulling the stock down to Rs113.95. The stock has risen some 110% in past three weeks.
Vidhya Sivaramakrishnan in Chennai and Ashwin Ramarathinam in Mumbai contributed to this story.