Monday, June 30, 2008

Et tu Sanjiv Kaul...?

Oops...I mangled the Bard! For good reason though, so he should forgive.
It seems Ranbaxy-Daiichi Sankyo deal has stirred up the PE nest. I quote Sanjiv Kaul, MD, Chrys Capital from BS

“The Ranbaxy-Daiichi deal is expected to make PE firms review their positions on investments in acquisition-prone industries like pharmaceuticals. PE companies invest in a company if they feel that its promoter can deliver goods. If the promoter changes, then its a different ball game. If such acquisitions are going to be a trend, a precondition factoring in such reverse-acquisition possibilities will have to be factored while making an investment decision."

My first reaction was why did Sanjiv - of all the people, find it so surprising. After all, he has moved to Chrys Capital after spending over a couple decades at Ranbaxy. I’ll explain why it stumped me.

PE term sheets ordinarily have clear clauses that protect the rights of PE investors. Tag along rights that effectively force the majority shareholder to include the holdings of the minority holder in the negotiations for likely exits on identical terms. Drag along rights that help a majority shareholder drag a minority shareholder also into a deal where the acquirer insists on a 100% buyout. Besides there are different forms of anti-dilution clauses (Ratchet clauses) where the founders agree to compensate the PE investors by topping up their stake so sacrificed, if any, as and when a new investor is allowed in.

Even in Ranbaxy deal, SEBI (SAST) Regulations don’t permit Daiichi to acquire more than 5% in Ranbaxy in a year. There are continuous disclosures to be made and especially if a PE firm is an investor, it has an automatic right to get notified, assuming that it doesn’t have ROFR. But these are all standard clauses and the fears at best, according to me, sound childish. Still if it is true, it speaks volumes about the quality of PE managers – but certainly not of the caliber of Sanjiv Kaul.

Sunday, June 29, 2008

Mutual Funds and art of wealth destruction

Equity mutual funds (EMF) raise funds from public when stock markets are upbeat. So why are they coming now?

I did a quick check on the cash position of a broad spectrum of funds. They have all liquidated recently and have suffered severe hemorrhage in the their NAVs. Most funds are quoting at a discount of over 35% from peaks. They all have pressed sales while markets sneezed. Reasons could be either redemption pressures or fund manager’s paranoia. Either way, it bodes ill for investors in these funds. These are the same funds now coming out with NFO, especially at a time when collections from NFOs have whittled down to 10% of their offer size.

Their intention is to average out their holdings or to buy new stocks that come cheap. Cheap as in fall from irrational peaks; not cheap as in price below intrinsic value - because in these times of global uncertainties, who can predict future earnings? All they do in those glitzy commercials about their investment skills is nothing but pulling a charade. What lies concealed is the brutal fact that these guys that man the funds are no pros. They are as gullible as you and me or worse. Yes, they sit in front of monitors all day and get paid fabulously for making more mistakes than you and I put together. If they make money, it's purely because a good tide in the market lifting all boats (read stocks). What they do is just play fast and loose with other people’s money. So a `hit’ just means lost commissions for them; no mortal fear of loss of capital or financial ruin that we investors may envision. It pulls the essential caution element out of their actions.

Saving money is hard. Investing it is harder. Trusting it with impulsive fakers is scary. Give them their place in hell.


Friday, June 27, 2008

Does anyone remember how to laugh?

More on socializing capitalism…. Governments in India tend to be unduly charitable in an election year. A sort of mind game the ruling coalitions play on the electorate so that the voters’ recent memory will be only of the government’s generosity – that helps beat the anti-incumbency factor. This year, our UPA government came out with the biggest of them all – farm loan waivers of about $18 billion and further $3 billion largesse to govt. employees by accepting generous recommendations made by the VIth pay commission. I’ve already blogged about that here.

Both commercial and cooperative banks in the state are facing the problem of loan default during the 2007-08 fiscal and the amount defaulted could be around Rs 5,000 crore. The percentage of recovery for cooperative banks is just around 10 per cent, while for commercial banks it is 10 to 30 per cent, he added.

Now there’s the outcome. Banks to which farmers owed all this money have stopped paying up and they face a liquidity crisis. They may not be able to pay their depositors if Government does not infuse large doses of capital into these cash starved banks immediately. This will bite them badly since the intention of the government was to announce the waiver scheme early (before the code of conduct enforced by the Election Commission kicks in) and win the farmers / govt. employees’ votes. When it comes to replenishing the banks, it needs to deal with the problem only if it gets another term at office [that is increasingly looking unlikely, given the rising inflation, crude price impact and slow growth rates] or smartly leave it for the new incumbent to deal with it and collapse under its weight before long. But who ever thought it will come back to haunt them so soon...

Socializing Capitalism...?

At the recently held meeting of energy ministers in Jeddah, P.Chidambaram, our Finance Minister (FM) proposed a Price Band Mechanism – that the consuming countries must guarantee that oil prices will not fall below an agreed level and producing countries must guarantee that oil prices will not rise above a guaranteed level.

Seems fair to Oil importing countries as of now… Now what if the Oil exporters demand a similar price band for their imports - iron ore, steel, consumer goods, IT offshoring contracts and even currency exchange / global interest rates - can the world cope?

What could be its economic nomenclature – socializing Capitalism or Capitalized Socialism?

Wednesday, June 25, 2008

ICICI Venture is clueless (just as every other PE fund is)

ICICI Venture is planning to list its $1.5 billion real estate fund on the London Stock Exchange (LSE) – News.

PE funds are running helter-skelter. Having espoused a business model in which they raise large funds out of bulge bracket investors to invest in profitable avenues that [are supposed to] yield returns far in excess of market rates, the current uncertainty prevailing in global markets are driving this tribe mad. Nobody knows when oil prices will decline or the threat of inflation recede. Still they have to be in business to recoup their earlier reckless investments that are quoting at 60% below their cost of acquisition; so what do they do?

They come up with ideas like this one – go list your fund. PE funds list their funds usually when they feel unsure of returns in the foreseeable future. But they won’t admit as much. They will tell you “we want to expand our investor base to include non-institutional investors (hedge funds, HNI) that would like to cash out early”. But that’s pure crap. Remember Blackstone listing? Its stock price never got back to its initial listing price of $31. The only investor that got rich was its founder Steven Schwarzman (of the $400 crab fame) who cashed out. If it's a close-ended fund, investors have to wait till its maturity. However, if the listing option is built into the document, then the PE fund can exercise it at any future date.
In other words, it means [to their investors] “Look guys, we’re clueless whether or when we will make money from our investments at all. But still we want to be in business so that we can earn our management fee [if not carried bonus]. So we will come to you for funds and continue our jig. For the pesky amongst you, we will list these funds so that there is always a two way quote available to you scumbags. Don’t pester us for returns. Just invest and forget, bokay?”

Do you read it differently? Tell me, if so.

Tuesday, June 24, 2008

The untouchables

Call them new age Al Capones... Inflation never bothers them. Liquidity crunch never gets anywhere near them. They are hugely wealthy private money lenders that step into a turf where all other sources fear to tread. Distinguished only by the clout of their enormous wealth and political connections, they keep a low profile that new age private equity moneybags can never come to terms with. Neither have they the glamour of a venture capitalist or of angel investors which they clearly are not, because they don't waste time on spreadsheets. When banks, financial institutions and other lenders retreat, they make their mark.

Their businesses could be as seedy as that of a Matka (betting syndicates) operator or as legit as that of a diamond merchant that provide them with a front and with an unmatched liquidity that opens up in times of distress to industries that find it hard to raise institutional credit. The real estate property developers and film makers often turn to them to finance their operations as these are deeply capital intensive businesses where cost and time overruns are quite common. Non availability of formal credit in time would mean instant death for the project. Expectedly interest rates range anywhere between 24% – 36% p.a. dependent mainly upon the level of desperation in the market and the number of seekers.

Life must be a lot easier for these guys. They lend on mutual references. What could be their business process? Terms like due diligence, anti-dilution provisions, valuation snafus, dividend recaps, exit worries don’t mean much to them. Funny that the mainstream lenders have such elaborate risk management tools, diligence checks and what not - only to face periodic business cycles at regular intervals to do them in by way of stock market collapse, subprime crisis and oil price surges :-)


Monday, June 23, 2008

Getting religion

I am getting ideas from the recent TPG–WaMu private equity deal where even the NYSE requirement – need to seek shareholder nod for any fresh stock issuance to an outsider in excess of 20% of existing capital base – has been reduced to a joke. This is besides its chairman Kerry Killinger getting the boot and TPG’s David Bonderman coming on board. Some of the features in that deal can be used in PE deals involving companies in India’s badly mauled Realty / financial services sector that are desperate for capital like WaMu. Seems like it’s already happening here. Look how Blackstone is raking up Gokaldas management. Samples from WaMu deal –

WaMu sold TPG 176 million shares at $8.75 each — 26 percent below the stock’s price the day of the deal; it also sold nearly 20,000 preferred shares that can be converted into WaMu common stock at $8.75 each. WaMu issued five-year warrants to the investors, allowing them to acquire 68.2 million shares of WaMu stock at $10.06 each, adding up in excess of 50% of WaMu shares outstanding with TPG including warrants and preferred stock.

Take a look at the terms -

a) if the transaction is not approved by June 30, WaMu will have to pay a special dividend with an annual interest rate of 14 percent to the TPG investors. If shareholders have not approved the deal by next March, more dividends will be paid at a rate of 15.5 percent. By September 2009 the penalty rises to 17 percent.

b) And if shareholders reject the deal, the price at which the warrants can be converted into common stock will decline every six months by 50 cents each, with a maximum drop of $2 a warrant. That makes the warrants far more valuable to TPG and its friends, and a lot costlier to WaMu shareholders.
Did someone say PE is fading because of liqudity crunch…? Walk them thro some of the deals that Mr.Bonderman struck for TPG. Soon they'll get religion.


Wednesday, June 18, 2008

Lenders up stakes

Real estate developers have been feeling the squeeze. Rising interest rates and slowdown have hurt sales, bringing down real estate prices 10 to 20 per cent across markets. Add in the rising steel and cement prices, input costs for developers go way up and the market meltdown has hampered their ability to raise funds at home or abroad. But it’s not misery all around, the least for lenders to Realty sector.

Promoters of Akruti, Omaxe and Sobha have pledged their shares with Indiabulls Financial Services, financiers like Dubai-based BankSarasin & Co and Credit Suisse as a liquid security for loans against properties.

Omaxe, it appears have an outstanding debt exposure of Rs.100 crore to Indiabulls Financial. On December 4, 2007, its promoters pledged 14.4 per cent stake as collateral with Indiabulls besides the security of assets and personal guarantee. Akruti City, has a net exposure of Rs 80 crore to Indiabulls. Between December 2007 and Feb 2008, Akruti's promoters pledged 10.62% stake with Indiabulls towards collateral. On September 11, 2007, Sobha Developers, which builds offices for IT major Infosys, pledged 7.81 per cent of the company's stake with Dubai-based Bank Sarasin & Co. A day earlier, the promoters had pledged 10.70 per cent with Credit Suisse.

I envy Indiabulls. If the realty markets don’t revive soon, the debt would become overdue and the lenders will promptly enforce their lien on the security including pledged shares. Then all they need do is sell them (to their own realty arm - Indiabulls real estate) when the market revives and recover many times over the sums they lent, assuming that it would be an arm's length transaction. So they get two birds with one shot. The finance arm recovers its capital + interest and the realty arm gets low price real estate going on fire sale. Wow - what a business!
Remember the times when our (erstwhile Developmental) Financial Institutions - IDBI and IFCI used to be in project finance and routinely accepted shares as collateral? Borrowers defaulted and they almost went under. But soon their fortunes improved when markets revived and they made a killing by selling those shares.

Indiabulls for that matter made no bones about its intentions. It had no charitable veneer of a DFI. It is a for-profit, perfectly private enterprise; Make money it will!

Tatas Man Up

Chivalry sometimes shows up when you run out of choices. When Tata owned Indian Hotels rights issue (6% NCD cum convertible warrants at Rs.150/- Offer size Rs.600 crore) got barely 19% subscription, the promoter group has the gall to pick up the unsubscribed portion – even as the stock is languishing at Rs.104/- at close yesterday.

The offer was doomed from inception. Wondering how Nimesh Kampani’s JM Finance let such a dubiously priced issue hit the street. The NCDs carried a 6% rate of interest when even AAA rated PPF is offering 8%; the conversion price of attached warrant at Rs.150/- (1 for 10 equity shares held) when shares were quoting Rs.114/- was insane. Ok. The name is TATA. But when the sentiment is rock bottom, names don’t mean much.

When markets thaw stock prices quote low and ideally clients should be advised to put off their fresh fundraising plans and instead use some group funds (they have bought in Rs.480 crore now to bail out the issue) to shore up their stake - either through a buyback or through creeping acquisition – like some smart founders do now. But then that would mean JM should settle for a lower fee (for buyback) or for just brokerage (from creeping acquisition), if routed through them. Anyway I-banks can’t count on Tata clientele for long; now that they are coming up with their own investment bank – Tata Capital.

Tuesday, June 17, 2008

Sahara is too big for RBI to pull up

Sahara group has always been mired in controversy. With no clear lineage of its monumental wealth and sudden emergence into the league of rich and famous, interests spanning from Financial Services to Airline (now divested) to real estate to entertainment and broadcasting, its source of funds has always been questionable. The publicized information that it aggregated small amounts from poor workmen and hawkers on a daily collection routine certainly didn’t cut.
And then the splash wedding of its Chairman Subrata Roy's two sons -
Hardly the cashflow stream that enables its founder Subrata Roy to conduct his sons’ wedding so loud, with unabashed brazenness. Get yourself a rehash of the ostentation. Note the array of guests that lined up. A former Prime Minister (A.B.Vajpayee, despite his famous weak knee), Mulayam Singh, Amar Singh, Bal Thackeray(traveling out of Mumbai after 15 years) et al to celebrities from the world of business, sports and entertainment. If feeding thousands of guests and 140,000 beggars were not enough, the cost of transportation, Z category security and palatial housing of dignitaries (Roy put up three mock palaces) that assembled in small town lucknow should’ve cost a fortune. In fact, it gave credence to the rumors that Sahara group was a politician’s safe haven for their bribe collections and wealthy industrialists’ unaccounted wealth under cover of collections from poor people. With so much `at stake’, it brewed itself into a heady mix – something that can never fail. That should never fail. An untouchable (even by the long arm of law). So what can a poor RBI do? How far could it get?

On June 4, the RBI banned the seedy Sahara group from accepting public deposits on grounds that it was not following the prescribed norms. Yesterday, the regulator promptly changed its earlier decision following Supreme Court-mandated meetings with top Sahara executives on June 12 and June 16 and after Sahara Chairman Subrata Roy had "a meeting" (dressing down?)with RBI officials. The earlier order directing Sahara to stop accepting deposits effective end of this month have now been revised to - hold your breath - another 7 years. A new lease of life (for some of the RBI officials to peacefully retire than for invincible Sahara to sort itself out!) till 2015, leaving enough time for all those who have stashed their wealth to recoup them ;)

Sahara is a big tree; so RBI has to prop it up before it falls and shakes the earth. But not everyone get so lucky. What RBI couldn’t do with mighty Sahara, it does with other NBFCs. Here's RBI getting back with a vengeance. Message : Be big before you are in play ;-)

Republic of SEZ?

Vinayak Chatterjee and his team sweat it out to bring up a status report on SEZs in Business Standard. Excerpts -

Bare facts : 207 zones spanning 26,825 hectares have been notified under SEZ Act, 2005. Another 246 zones spread over 30,900 hectares have been given formal approval and further 136 zones over 33,500 hectares have been accorded approval in-principle. Total area over 91,225 hectares - enough to comprise a mini Republic of SEZs with separate passports and visa requirements...? Might as well be.
They also check some facts out -
IT and BPOs at the forefront: accounting for 66 per cent by number, and about 15 per cent by area — of notified SEZs (excluding their share in multi-product/service zones. Implications for commercial real estate space outside SEZs?

Five coastal states Gujarat, Andhra Pradesh, Maharashtra, Karnataka, and Tamil Nadu, in that order hoard as much as 90 per cent of the total notified area. Gujarat and Andhra Pradesh, having the largest concentration of private ports hold over 60 per cent notified area. Development imbalance?

Applicant profiles indicate excessive non-manufacturing (white collar) job creation than blue collars. One of the main argument behind widespread displacement was the rationale that it will create significant job ops for both skilled and unskilled workers. Now that assumption gets beaten. Nearly 70 per cent of the direct employment created by exporting industry will be in ‘white-collar' services sectors. Specifically, the IT sector will account for nearly 5.5 million of the total employment across all notified SEZs.

Utility supports: Currently notified SEZs require more than 15,000 mw of power generation capacity, 2,500 million litres per day of water supplies, and logistical capacity to handle nearly 1 million TEUs of export traffic annually. Tough call given the precarious predicament of power sector now.

Cost-benefit debate: Notified SEZs project a pre-tax profitability of nearly Rs 2000 billion ($47 billion) annually. Nation to forego nearly Rs 660 billion ($15.53 billion) of yearly tax revenues (or Rs 440 billion if MAT is enforced). Further SEZ developers aim for tax benefits totalling to Rs 350 billion for their initiatives. So what could be the sacrificial lamb when so much of revenues are foregone? Something is gotta’ give!

Why not government go the UMPP model, taking upon SEZ development upon itself before letting it go private – just as they did for UMPP?

I see something else. IT companies coming into SEZ over time will be shrewd real estate managers. Later when their own outsourcing businesses face a downturn (India can’t be the world’s outsourcing hub forever), they can develop these large tracts of land and glistening towers and cash out handsomely. If you agree with me, Infosys at Rs.1900 and TCS at Rs.900 are pretty cheap buys now because they are a play on IT + precious real estate. Get nibbling them as they relocate (oops, sorry, they are not allowed to relocate existing units!) ....errr, when they start moving in, one by one, leaving a shell behind that is ready possession, plug and play…

Sunday, June 15, 2008

"Not so much of crunch, really"

The global economy clearly slowing down, inflation inching up, oil prices showing no signs of a decline – normally investors should be keeping away, or so you thought.

You can’t be more wrong. India Inc witnessed the announcement of USD 640 million worth of PE deals in May this year, about six times over April deal volume and 12x May, 2007 record. The Jan-May 08 figure is $6.39 billion into India alone as against 159 deals worth $ 4.97 billion during same period in 2007 reports Grant Thornton.

This is the type of news that could pull in a lot of fence sitters – investors that got cash but not sure when to enter. “So, come on guys, jump right in. Let’s have some piece of action, have another ride. Last six months were boring.” RBI seem to want it too. It's throwing open the gates. See here.
Don’t believe me? Here is a wave theory or is that Five?

So investors, the big rich guys are back. Soon stock prices will get back up. Go get some of those momentum jacks that look like value now, in case if you had the good sense to stay on cash :-)

Saturday, June 14, 2008

Realty wisdom - "build frill-free houses"

PE funds clearly having the upper hand. If you had longed for a piece of India’s realty pie and couldn’t get in because of unjust valuations, now is the time. Why, you can even wring and squeeze them on terms your own.

Industry experts feel the only avenue available for raising capital in the current situation is at the project SPV level and by way of private equity or similar sources, that is generally the most expensive method of raising capital. Concerns about liquidity will continue to plague the market since debt will not be easily available. Real estate players had traditionally raised money from debt funds via corporate deposits and commercial paper. However, debt funds are currently not eager for more exposure in real estate and are continuously rolling over the debt advanced to these players. The primary source for institutional funding will, therefore, now be private equity.

So, there you go. Pick up the thread and buy into a few near-finished projects on the cheap. By all means worry about inflation and falling sales numbers. But India is still a market with large unmet demands for housing. All that you need to do is drive some sense into your portfolio companies to build affordable, frill-free houses that people can call home – where end users drive demand of what was once a neat long-term investment; we used to call it `property’ then - ringing in permanence and legacy - not an `asset class’ as defined by wealth managers now.
[Caution - Sales pitch. If you are a realty / infrastructure player looking out for some large funds for your FDA compliant project, I have a few private equity investors that are interested. Just send me a mail at with your project report / business plan and I shall be glad to assist.]


Ranbaxy open offer is biased

So many conjectures and assumptions surrounding impending Ranbaxy open offer.

As it exists today, if you acquire 15% or more of a target company, you have to make a compulsory open offer to other investors of the company to buyout further 20% stake from them – the idea is to give those investors an exit option at the same price. But there’s a catch. While promoters can exit their entire stake, the rest of the shareholders can only exit partially – if the acquirer does not want to buyout the entire outstanding shareholders.

In the Daiichi-Sankyo acquisition of Ranbaxy, the promoters are exiting completely at a price of Rs.737/-per share for their 35% holding. Now Daiichi-Sankyo (acquirer) has to make an open offer for another 20% at or about the same price - which is at a significant premium (Rs.194 or 35.72%) to the closing price of Ranbaxy share at Rs.543/- yesterday. So if the remaining holders of [entire 65% non-promoters] tender their shares in the open offer, only 30.7% shares offered will be accepted resulting in a rejection rate of 70%.

However, the preferential issue would also play an important role as it would change the acceptance ratio. If the preferential issue is made before the open offer then the capital base would be enhanced, affecting the acceptance ratio. Open offer on current base of 373.2 million share (would) result in buyback of 74.63 million shares (30.7% acceptance) and in case of an expanded base 419.3 million (adding preferential issue of 46.26 million), it comes to 83.85 million shares (34.5% acceptance).

I imagine a "what-if" scenario. If I hold 100 shares of Ranbaxy and tender it in the open offer, only 30 shares will be accepted by Daiichi-Sankyo at Rs.737. I will be left holding the remaining 70 shares and exposing myself to vagaries of price action post open offer, which will certainly be, down. But the promoters would have made a neat exit with full premium in their pockets. How fair is that? Well, they may explain it as “control premium” – for having stuck with the company for over 75 years and having not entered or exited like ordinary investors. Still it rankles.

Why not make the acquirers make a minimum open offer to public, as far as possible, equal to the percentage of shareholding acquired from the promoters – which is 35% in this case? That would restore a semblance of fairness. [Of course subject to Listing Agreement post offer minimum public holding criteria]

To buy 100 shares today, I have to invest Rs.54,300 @ Rs.543 a share. If I tender all these shares, only 30 shares will be accepted at Rs.737, fetching me Rs.22,110. Since this is an off-market trade, I will take a short term capital gains tax knock of 30% (+ cess) on the gain (Rs.194 x 30 shares), netting me just Rs.20,306. So my net investment on the residual holding of 70 shares will be (Rs.54,300 – Rs.20,306) Rs.33,994 or Rs.485 per share. Post offer, if Ranbaxy stock price falls below Rs.485/-, the holder is incurring a net erosion in value.

Now Ranbaxy has an EPS of Rs.17.50 giving it a P/E multiple of 31 at its current price of Rs.543. Will it be sustainable post open offer in these harried times of oil price surge, global inflation and waning sentiment in our markets? When the public offer euphoria dies down, the stock will end up quoting at an average P/E of let’s say 17, the price of the Ranbaxy share will be around Rs.290/- leaving me to stare at an erosion of 47.65% in my Ranbaxy holding.

Now you know why Ranbaxy stock price is not going anywhere even after the news of its acquisition by Daiichi-Sankyo… It’s a play on capitalism again. Loaded in favor of promoters. Remember – rich getting richer…?

Readers, what do you think?
[Update : Thanks to reader Ratan for correcting me on the STCG error in the original post, that now stands revised.]

Thursday, June 12, 2008

Croc tears from Drug barons

Sticking with the Ranbaxy Daiichi-Sankyo deal. Industry experts get emotional.

Here goes Swati Piramal, Director at Piramal Healthcare using the occasion to beat the national drug policy –

"If the promoters of India's largest drug company felt it better to exit business after many years of attempts to make it one of the largest in the world, then there must be serious issues with our drug policy… The government and other authorities should seriously think about it. We have always maintained that Pharma companies should be allowed to invest their profits in research rather than squeezing them with more price controls for more drugs. Nicholas Piramal always felt the generic business model is unsustainable in the future…".
Oh, really…?

Since when did Indian Pharma companies commit serious investments in proprietary research (not sponsored or contract research funded by others)? They had always scavenged from expired patents of other MNCs or come up with some `spray paint' incremental innovation. I look up FY 2007-08 results of Piramal Healthcare (Nicholas Piramal). It’s just 5% of annual sales of about Rs.2850 crores. Rounding error? That is apparently including the spend from its in-house R&D division - that too is now demerged. So next year its R&D budget would be in decimals.

A better perspective could be gotten by analyzing the SG&A with sufficient break-up of payoffs to doctors (in cash or by way of free foreign junkets for their family, picking up the tab of decking up their clinics' interiors, free supply of expensive surgical equipments and other freebies) in return for liberal prescriptions.
"World beater DNA is different, Ms.Piramal!".
It’s Research with a capital R. Any short cuts would mean huge patent infringement lawsuit costs. [Ask Dr.Anji Reddy, he came closest]. Invest in scientists that invent (not Doctors that splurge), lab equipments and in strategic partnerships with global research institutions. I would go with the pragmatic opinion of Dr.D.S.Brar, co-architect of Ranbaxy as it stands today. He has been an insider, knew the turf, didn’t mince words nor held any moral high ground. Here he goes.

“The dynamics of the global pharma industry is changing. Generics businesses across the world [are] becoming highly competitive and companies operating only in the generic space are facing strong growth challenges. Global pharma firms want a mix of generics, a strong research and development (R&D) pipeline and bio-generics. The deal with Daiichi will help Ranbaxy to tap all the growth opportunities in the global pharma market.”

But I do understand the ROI compulsions of Ms.Piramal and her ilk. They should either stick with bulk generics and sponsor-the-doctor strategies. Or smartly cash out like Malvinder did in Ranbaxy when he felt enough is enough. For a change, I love the Government drug policy. Don’t beat the government for price controls, but for that Drug companies would be selling a strip of paracetamol for Rs.500/-. Remember Cement and Steel cartels...?
Here’s more

“Commercially, it is an awesome deal. However, Ranbaxy was the all-conquering Indian hero and should have been the last man standing instead of being the first to capitulate. A huge positive for Ranbaxy but a negative for Indian pharma.” says Sanjiv Kaul of M.D. of Chrys Capital (Ex-V.P - Ranbaxy.... hi...hi...hi...)
("So why did you cross over form Ranbaxy to Private Equity, Mr.Kaul?")

Instead why not give Malvinder some usable tax advise in these windfall times?

Tuesday, June 10, 2008

Burning question : what will happen to Ranbaxy subs?

Japanese major Daiichi Sankyo is set to buy the promoters - Malvinder Singh and Shivinder Singh's 34.8% stake in India's largest drugmaker Ranbaxy Laboratories.

The Share Purchase and Share Subscription agreement has been unanimously approved by the Boards of Directors of both companies. Daiichi Sankyo is expected to acquire the majority equity stake in Ranbaxy by a combination of (i) purchase of shares held by the Sellers, (ii) preferential allotment of equity shares, (iii) an open offer to the public shareholders for 20% of Ranbaxy's shares, as per Indian regulations, and (iv) Daiichi Sankyo's exercise of a portion or all of the share warrants to be issued on a preferential basis. All the shares/warrants will be acquired/issued at a price of Rs.737 per share.

This purchase price represents a premium of 53.5% to Ranbaxy's average daily closing price on the National Stock Exchange for the three months ending on June 10, 2008 and 31.4% to such closing price on June 10, 2008.

Burning question – will there be open offers in its subs Zenotec, Jupiter Biosciences, Krebs Biochemicals and Orchid Chemicals?

If the deal comes through, it would mean a complete exit of Ranbaxy promoters from the company. SEBI regulations mandate any acquisition in excess of 15% in a company will trigger open offer and the acquirers will have to buyout at least 20% from the other shareholders at the same price they paid the promoter or the price computed by SEBI formula, whichever is higher.
I like the shift in trend. Long held family stakes are no longer looked upon as non-disposable heirloom by younger generation. If an acquirer comes along offering 3x sales or at an attractive premium, the owners are willing to exit. That means there's a lot going for dealmakers like me. Long live change agents like Malvinder Singh! Hope the deal goes thro smoothly and closes fast. We don’t want a repeat of Bharti-MTN-RCom conundrum…...!!!
[Update : Open offer will be triggered in Zenotech]

invoking Caveat Emptor

Guess Indian firms lately have been waking up to global connections of Private Equity.

Noida-based Phoenix Lamps Ltd, in which UK-based Actis bought a controlling stake last year, is cashing in on a slew of global tie-ups with international lighting firms, aggressive forays into international markets including Europe and West Asia, and rapid ramping up of capacity.

Aurangabad-based Endurance Technologies, in which Standard Chartered Private Equity Fund picked up stake a couple of years ago has been on a roll ever since, acquiring three European firms and opening a Detroit office.

Gokaldas Exports, India’s largest garment exporter, decided to sell out to Blackstone Group for $165 million in August last year to leverage Blackstone’s financial muscle and contacts in the key US market.

Shaken but not stirred by impossibility of leveraged finance, the private equity barons have been looking to move on. Dismayed and disillusioned western investors will no longer play ball. In the leveraged loan markets, assets have been marked down by a fifth, so 80 cents in the dollar is the new par. Thus the financial alchemists have turned to the huge pools of money available in the Middle East and Asia.
The vanity of the PE model attributed to its strategic (besides financial) prowess has been significantly exposed after the recent liquidity crisis in the Wall Street – where PE firms and its I-bankers abused the inept regulatory regime and lax credit conditions to erect dubious financial structures. Nobody bothered about the obscene management fee charged by the LBO architects that maintained that a superior financial structure is worth it all. Time to get back to the original PE model – no debt, no leverage; just plain capital invested in a business that screams `opportunity’.

Hope Indian firms don’t call the PE bluff way too soon like their cousins in the developed world… I invoke Caveat Emptor ;)

Sunday, June 08, 2008

Don't drag RE deals, close them fast....

As real estate prices take a tumble (industry players won’t openly admit though), PE investors commit routine mistakes. In the garb of expecting a higher IRR from their investments, they badger down RE entrepreneurs and their asset valuations. In effect, they delay deals.

So what’s the big deal? Is it not expected of them?

I disagree. This is the time when entrepreneurs are hard pressed for funds and deals can be closed fast at a steep discount as developers are desperate. Demand has certainly slumped but completed projects do find takers. Last year, PE players were signing deals at ridiculously high valuations and had no complaints. Now if they have to make up for their past sins, they have to sign a few deals at a discount and fast. Delaying deals would mean loss of opportunity since long term fundamentals haven't altered one bit going by large global commitments heading our way. Take the structured finance route (deals with in-built covenants for priority returns / higher preferred equity holdings to cover the downside risk of the investor if prices decline further) if necessary, but close deals fast. Wisdom demands closing deals sooner when inflation is high and prices take a tumble ; because even a marginal decline in inflation could drive prices back up.

Want to listen to some developer clamor? Here they go seeking tax exemptions for REITs in line with Mutual Fund units. But are we ready?

REITs would provide an early exit for PE investors in a RE project, but what’s left on the table for REIT investors? For a low down how REITs suit risk-averse retail investors in India, check here.

Thursday, June 05, 2008

Best hedging strategy : Go Naked

CFOs are taking it on the chin again. Earlier they got the stick from their boards for not foreseeing the fall of the dollar. Now they are held guilty of not anticipating a Rupee fall. Poor bean counters, they’ve nowhere to hide.

Before the mortgage crisis hit the developed world, the surge of dollars into India strengthened the Rupee. It gained about 12% from Rs.44 to Rs.39 and all hell broke loose with India’s exporters. Businesses had to protect their margins and they sold dollars forward hoping the currency to keep its downward drift. Now the reverse is happening. The Rupee has weakened by 7% and is touching 42.50 to the dollar. There is an opportunity loss (of Rs.2.50) here since the exporters have already sold their dollars forward (at Rs.40). For those exporters who have taken leveraged options (selling 2 calls and buying 1 put to maintain a zero cost hedge), they face a cash loss since two calls would be exercised by the option buyers against one put exercised by the exporter.

Heads I win, tails you loose, huh….? Take my word. When you earn exchange windfalls next time, book those profits into a separate Exchange Fluctuation Reserve and don’t take credit for it as business income in your revenue account. The surplus realization is anyway available to you in the form of working capital. You didn’t earn it because of your endeavors. It just happened. Not many CEOs will like it, I know! Use the same reserve to write off losses you suffer when exchange rates turn adverse, some day in future. That way your ass won’t get laid on that fired up grill. No risky hedges called for; just go naked.

Tuesday, June 03, 2008

Go, celebrate democracy

Dither. Dither. Dither. Looks like this is the new way to govern... The Cabinet Committee on Political Affairs (CCPA) will meet tomorrow at 8 am to consider raising petrol, diesel and cooking gas prices. They still are meeting even as crude prices soar, oil marketing companies bleed, inflation is nowhere near control. PSU Banks and Small savings scheme interest rates are way below inflation rates. Government was quick to cut rates in succession and when it comes to hiking it, they are still “meeting tomorrow” or “under consideration” mode – just as in Oil prices. Go, celebrate democracy!

Here I quote Pritish Nandy

“So angry is the middle class that the Congress is losing every bypoll, every election. Despite having a world class economist as Prime Minister, no one trusts their ability to manage the economy. The excuse is inflation. But what's the single most important factor, apart from increased taxes, that stokes inflation? Fuel prices. Fuel prices impact everything. Yet the common man is never told what the actual cost of fuel is, though we are constantly badgered by statistics that claim the State-owned oil companies are making huge losses to subsidise us. What's hidden from you and me is that there are a whole lot of invisible taxes and duties the Government collects from every litre of fuel sold. In other words, the much maligned Left is right.”

I agree. Left is often right – except in States where they rule (Kerala, West Bengal) where they make sure nothing works.

Sauce for the goose is (not) sauce for the gander

The Reserve Bank of India (RBI) today barred banks and financial institutions from extending loans to promoters and entrepreneurs, who have siphoned off funds and engaged in frauds for five years to start new ventures.


Monday, June 02, 2008

Best time for vault owners

Multi-triggers that burst the myth of a rising real estate market have begun to bite the landlords. Too much of froth and bubble that got built in the real estate sector is now being flushed out.

Those who argue that land prices will remain stable because of its limited supply should be asked to take a look at inflation numbers. Ask Wadhwa Builders that paid Rs.46,000 per sq.ft at a record land auction at Mumbai’s Bandra-Kurla Complex in November 2007. Compare that with the last auction at BKC, by Jet Airways, where rates tumbled to Rs 32,000, a drop of a whopping 30% in just about four months.

I ran a check on some prominent real estate stocks. The BSE realty index is the worst performer this year, having shed 51% of its 52-week peak reached in January. The country’s largest property firm DLF’s scrip lost 54% while Unitech shed 64% from its peak. The scrips of Delhi-based Parsvnath and Omaxe have lost 68% each since January. Not just the sellers were smart. Imagine the windfall to govt. from stamp duty and registration charges at the peak price! If they could wait for another 6 months, the costs of registration Wadhwas paid for that deal will outgrow the cost of the land they got.

Best times for vault owners…?