Jubilant, which also produces various chemicals and adhesives, raised $200 million from a bought deal arranged by JPMorgan which offered the bonds on to investors at fixed terms which included a 50% conversion premium. It was the fourth time since May 2004 that the company has raised cash from the sale of equity or equity-linked instruments, including two previous CBs that will mature in 2009 and 2010 respectively.
The stock hasnÆt had the same spectacular share price gains as some of its peers in the past, but shot up 8.72% on Friday and Monday after the company received regulatory approval to sell a generic copy of muscle relaxant, Flexeril in the US.
The company also issued a statement on Monday saying it is currently evaluating a possible acquisition of a non-Indian company in the pharmaceutical and life sciences sector, which helped attract further interest to the offering.
ôThis acquisition, if consummated, would be material to our business, as the relevant companyÆs revenue for fiscal 2005 and market capitalisation was approximately $500 million,ö the company said in the statement. It added, however, that there are believed to be other bidders and the process is still at a very early stage.
Jubilant has a market cap of about $893 million.
According to a person familiar with the CB offering, a small group of investors drummed up enough demand to cover the issue, allowing JPMorgan to get its money back. About 60% of the interest was said to have come from Europe with Asian investors picking up the rest.
According to a market participant, the bonds were trading slightly above par yesterday, while the share price dropped 1.9% amid a broad-based market decline.
The bonds will pay no coupon, but will redeem at 142.429% of face value to give a yield to maturity of 7.2% per annum. The conversion premium was set over MondayÆs volume-weighted average price of Rs275.6332, resulting in a conversion price of about Rs413.45. There is an issuer call option after three years subject to a 130% hurdle.
The underwriter offered asset swaps for about $75 million of the bonds at 270 basis points over Libor and the bond floor was set at 97.1% to compensate for the high premium. The implied volatility was identical to the historical volatility at 28%, and roughly in line with the share price gain of 25.7% so far this year.
Other underlying assumptions included a dividend yield of 1% and a stock borrow cost of 5%.
The bond floor was slightly lower than the 97.8% offered on the $150 million Tranche A of Aurobindo PharmaÆs CB that was priced early Saturday and which also featured a 50% premium. One observer said investors were willing to pay ôa little bit moreö for the Jubilant equity option as the credit is slightly tighter than AurobindoÆs 315 basis points over Libor.
ôA 50% premium is not a favourite of any investoràbut the downside is limited at three basis points (for the equity option),ö he said.
Indeed, with the right compensation, investors are still willing to take a bet on CBs from IndiaÆs fast-growing drugs industry, many of which feature premiums at similarly high levels. JubilantÆs offer was the seventh from the same sector since the beginning of December and according to bankers there are more in the pipeline.
JubilantÆs CBs was likely the first leg of a fundraising plan after JubilantÆs board of directors on April 18 gave the company approval to raise up to $325 million for acquisitions, capacity expansion, modernisation, working capital requirements and other corporate purposes. Aside from CBs, it can also raise funds from the sale of ADS, GDS or other equity-related instruments.
In a recent research note, B&K Securities argued that the company is well placed to benefit from the outsourcing story across the value chain following strong investments over the last few years, which has seen it evolve into a vertically integrated player. It has very aggressive growth plans both within manufacturing and services and ôhas been increasing the width of offerings through an aggressive M&A strategy,ö the note said.
According to the Indian securities house, Jubilant is ôcomfortably placed for a CAGR of 24% in revenues and 52% in profits in 2006-2008.ö
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