CMQ 0.00% 8.3¢ chemeq limited

news: disastrous finance deal?

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    Tough terms for Chemeq lifeline
    Geoff Elliott
    January 07, 2005
    IN the US they are cheekily called "death spiral convertible bonds" - they provide life-saving cash for a company but on such onerous terms the company and its hapless shareholders cede all control to the financiers.

    Maybe that is not such a bad thing in the case of Perth-based biotech company Chemeq, which yesterday announced it was issuing 40,000 of these sort of bonds.

    While "death spiral bonds" is not a phrase to be found in Chemeq's term sheet with the London-based Mizuho Financial Group -- a subsidiary of Japan's Mizuho Securities -- the company acknowledged yesterday that, if the deal goes ahead, Mizuho will end with up to 47 per cent of the company's shares.

    And Mizuho will not pay a premium for those shares.

    By offering up to $60 million in desperately needed cash to Chemeq -- which is down to its last $11million and spending up to $3million a month with little or no cash flow coming back in -- Mizuho gets Chemeq shares at about $1.10 or even lower.

    That compares with yesterday's extraordinary 27 per cent rally in the company's stock to close at $1.90, after earlier touching a high of $2.15.

    For the privilege of Mizuho's cash, Chemeq is paying an 8.5 per cent interest rate and it gets $2 million paid back to it for expenses if the deal is completed.

    Mizuho also will be able to appoint two nominees to the Chemeq board, with the right to veto any candidate proposed for the new chief executive and new chief financial officer.

    Under the deal, Chemeq has agreed to hire a management team recommended by Mizuho, with operational, marketing and finance expertise, for at least six months.

    Mizuho is also paid up to $1.5million if the deal does not go ahead, as well as getting the option to buy 15 per cent of the group anyway at $1.10 a share.

    Despite terms that some analysts were describing as "brutal", founder Graham Melrose -- who last year won a 50 per cent pay rise despite Chemeq's infamy as the worst performing stock in the S&P/ASX 200 for 2004 -- said the deal was a "strong endorsement of Chemeq".

    He said Chemeq's factory would be up and running this year producing its poultry and pig feed enhancer for the international markets, adding "for our global beachhead, we need global financing".

    "The support we're getting from Mizuho ... offers immediate growth opportunities for shareholders and secures our long-term future," he said.

    But whether shareholders approve what is in effect a partial takeover -- they were asked to buy shares just last August at $2.40 share -- is another matter.

    Shareholders are due to meet in late February.

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