The Hindu Business Line : Targeting Orchid

Down 44 per cent in a single week and up 93 per cent in the next fortnight! That’s the story of the Orchid Chemicals stock over the past 3-4 weeks. Orchid’s newfound status as a possible takeover target has prompted investors and traders to take a ‘look-in’.

With its market value at Rs 1,633 crore, acquiring a 51 per cent stake in the company may be quite easy for the Indian pharma biggies, which are routinely completing at least one Rs 1,000-crore-plus buyout every year. The promoter’s low stake in the company (the promoter recently offloaded stock to pay for margin calls) is fuelling the speculation.

At the close of trading last Friday, Solrex Pharmaceuticals (a partnership firm said to be linked to Ranbaxy) through a series of bulk deals struck over the fortnight, had gained control of nearly 87 lakh Orchid shares, representing an over 13 per cent stake in Orchid’s current equity base. Its acquisition would give Ranbaxy a strong presence in antibiotics and decent revenue visibility from Orchid’s pipeline. A majority stake would require another 38 per cent. Solrex may have sealed smaller deals that have may not have technically qualified as bulk deals, but will surely increase holding.

While foreign institutional investors held 16 per cent in Orchid in end-March, non-institutions, including public held 49 per cent. This leaves any potential acquirer with substantial leeway to mop up shares, if the price offered is good enough.

Weighed against this, the promoter has the option of converting some 50 lakh warrants held by him into equity as a last-ditch effort to ward off a hostile takeover; but this would require an infusion of Rs 90 crore. Not only would such a move increase his stake, but it may also effectively reduce the stake of others. Though it would increase Orchid’s equity base by 7.5 per cent, diluting earnings per share, it would ramp up promoter’s stake by 6 per cent to 22 per cent.

However, Indian market has seen practically no instance of a successful hostile takeover bid. In the past, Ranbaxy has struck up partnerships with smaller but niche pharma companies such as Krebs Biochem and Jupiter Biosciences, that have not always culminated in a takeover. Only in Zenotech’s case has Ranbaxy finally gone ahead to acquire a significantly larger stake, after beginning with a smaller one.

KUMAR SHANKAR ROY

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