Healthy future

Zenotech Labs is a specialty generic injectables company with a strong expertise in the area of bio-technology. Its predominantly high value injectables product portfolios serve niche therapy areas such as oncology and anaesthesiology. It is a subsidiary of Ranbaxy Labs and hence now of Daiichi Sankyo (DS) which bought out Ranbaxy in 2008. In January ’08, Ranbaxy had acquired nearly 47% in Zenotech @160/share. But in June ’08, Ranbaxy itself got acquired by DS. As per SEBI rules, DS made an open offer for Zenotech @ 113.62/share as per the prevailing rules of the highest of the 6 month or 2 week price following the announcement. Currently, Ranbaxy holds nearly 47% and DS holds the 20% it acquired in the open offer following Ranbaxy’s acquisition. The founders (Jayaram Chigurupati and his family) still hold nearly 26% in the company. The point to note is that the floating stock in the market is just about 10% (or even below it) and is below the acceptable limit of public shareholding. This also means that they will have to either delist the company or lower their stake by at least 15% or more, which is a significant amount in terms of number of shares as well as the cost.

This company has been in the news for all the wrong reasons over the last few years since Ranbaxy’s takeover. The main reason for this state of affairs is the dispute between Mr. Jayaram Chigurupati (JC), the founder and erstwhile promoter of Zenotech Labs, and DS regarding the open offer price. Zenotech and its founder challenged the open offer price with the argument that since Ranbaxy is now a subsidiary of Daiichi and by definition the 2 are Persons acting in Concert, the PAC definition can be applied retrospectively to the time when Ranbaxy acquired Zenotech. And since at that time Ranbaxy paid 160/share, 160 becomes the applicable price for Daiichi's open offer for Zenotech. Zenotech's argument won in the Securities Appellate Tribunal (SAT) in October 2009, much to the surprise of India’s legal & M&A community. However, DS appealed in the Supreme Court who overturned SAT ruling and cleared the open offer. 

However, last year, in a new twist to Ranbaxy-Zenotech takeover dispute, Zenotech Labs founder JC moved the Company Law Board (CLB) seeking permission to buy back shares from Ranbaxy and its Japanese owner Daiichi Sankyo. JC said he was willing to pay about Rs 130/share to take back Zenotech, which has been in rough weather after being acquired by Ranbaxy in 2007.

In July ‘12, JC filed a petition in the Andhra Pradesh High Court challenging the FIPB approval allowing Daiichi to acquire 20 per cent stake from Zenotech’s public shareholders. According to the petition, the FIPB failed in complying with the rule book by not seeking the Board resolution of Zenotech for foreign collaboration coming in the form of Daiichi. The FIPB approval had also allowed Daiichi to acquire another 20% stake of Zenotech through an offer to the public shareholders. In the current petition, Chigurupati is seeking setting aside of the approval and restraining Daiichi from exercising its voting rights in Zenotech, in addition to stopping the foreign company from making any structural changes to the ownership of Zenotech. He also accused Daiichi of mismanagement and non-payment of salaries forcing its 200-odd employees to quit.

In the latest development, Dr. Jayaram Chigurupati has ceased to be the MD of the Company upon completion of his term on September 30, 2012.

Looking at the above factors, this case bears a distinct resemblance to another company called DISA whose shares were also held up in court over a dispute regarding the open offer. Post the court decision, their shareholding increased to about 86.5% currently. So they also need to decide soon how they plan to stick to the 25% public shareholding norms.

Considering a strong parent in the form of Ranbaxy/DS and the low public shareholding, this should give good returns over a longer timeframe. There are 3 scenarios:

1.  The CLB/Ranbaxy/DS accept JC’s proposal to acquire the shares @130/share and delist the company. The current price is about 35. Huge windfall for the public shareholders as everybody will get this price and the company will be delisted.

2.   Court accepts JC’s petition that the 20% acquired by DS was wrong and he wins the case. In which case, what happens to the 20% that DS acquired is still unclear.

a.  If it is extinguished, Ranbaxy will end up having about 59% stake with the founder JC holding about 29% and the rest with the public, in the new shareholding structure.

b.  If the court asks DS to return the shares to the original holders from whom they were acquired, it would be similar to the option above. But then the question would be what happens to the money that DS paid to these shareholders for the 20% stake? No shareholder would be either willing or happy to return the money and get the shares back. There may be further litigations on this count unless the court takes a holistic view and lays down clear rules regarding handling of all possible options arising out of its decision.

c.  If it is bought by JC, he and Ranbaxy will become nearly equal shareholders with each holding about 45%.

d.  If it is bought by Ranbaxy, Ranbaxy will end up with 67% and JC’s share will remain the same i.e. about 26%.

In any of the above cases, they will then have to reduce their shareholding to stick to the 25% public holding norm. Again the price at which they do so will be a crucial factor.

e.  Or one may buy the other out. In that case, the price would be interesting since JC has already offered 130/share to buy Ranbaxy/DS share. Even if this looks farfetched and may not materialize, the price may well be at a premium to the current price. And as is seen in open offers, the price tends to shoot up immediately after the announcement and settled down close to the offer price.

3.   Court as well as CLB rejects JC’s proposal and upholds Ranbaxy/DS version. It will again be similar to the second option above whereby they will have to reduce their shareholding to stick to the 25% public holding norm.

In both options 2 and 3 above, if it boils down to either or both of the majority stakeholders reducing their holding, the price may be the clinching factor and this is where it gets risky. For, if everybody plays by the book, the price may not be attractive going by the average price over the last year or so.

However, over the longer term, once these issues are resolved, and Zenotech Labs gets back on track to doing what it does best (assuming it remains listed with either Ranbaxy/DS combine or JC at the helm), it would be back to its glory days a la Wockhardt. The only question is how long the longer term will stretch. The jury is still out at this point.

Once thing though, looks certain. Things can’t continue as they are now with public shareholding close to 10% and the June ’13 deadline not too far away. It is a question of who blinks first.