chemeq rescue bid hatched

CHEMEQ'S foreign rescuers were poised to consolidate their hold on the embattled Perth-based pig and poultry drug maker yesterday after retail investors resoundingly rejected its recent options offer, exercising just 3661 out of the 8.3 million options available.

The company went into a trading halt yesterday pending a financing announcement related to a $20 million issue of convertible bonds to Mizuho International (MHI), Spark Trading and Shepherd Investments.
Chemeq's lenders underwrote the options issue so the new issue is a direct result of the poor take-up.

After the issue they will have the option to buy almost 50 per cent of its equity.

The three firms stepped in to rescue Chemeq with $40 million in January this year as lenders of last resort to the company as it haemorrhaged money at a rate of $3 million a month with no significant revenues in sight.

"The investment by MHI is an endorsement of the future of Chemeq," the company's chairman and chief executive officer, Graham Melrose, said at the time.

Dr Melrose, 71, plans to step down as soon as the company has found a replacement for him, although he plans to remain as a director.

Mizuho and its co-investors also agreed to underwrite Chemeq's $20 million options offer which was struck at $2.40 and closed at the end of June.

Unsurprisingly, since the stock has consistently traded below the strike price and is now trading at $1.18, Chemeq found few takers for the option deal.

Yesterday's announcement indicates that the company's backers now intend to make good on their promise - although it is conditional on Chemeq providing evidence of 40,000 litres of orders for the coming year.

Chemeq's lifeline comes at a heavy cost, however. Known as "death spiral convertibles" in the US, because their terms can push a company into a death spiral - these sort of deals cede significant control and a large chunk of cheap equity to Chemeq's lenders.

The convertible price on the first tranche was the lower of $1.10 or the volume weighted average price (VWAP) for the 30 days prior to conversion with a floor of 55c.

The latest $20 million of convertibles give Chemeq's rescuers the option to convert at the lower of $2.40 or the 30-day VWAP.

The $1.10 price looked a steal in January. Chemeq's shares rallied to $1.90 after the rescue was announced.

But the stock has trended steadily down since then, leaving that original deal looking considerably less attractive.

But Mizuho et al will make money from Chemeq as long as the drug maker stays afloat.

The lenders are charging an 8.5 per cent coupon on the bonds, payable quarterly. They also received a $2 million fee for the original deal and stand to receive a $350,000 underwriting fee from the new financing.