Description

Claris Lifesciences is a special situation where the stock is trading on negative EV. The absolute returns on this investment could be between 10-30%+ within a 3-7 month timeframe trade, with very limited downside. The company is going through a voluntary delisting process - the company sold all of its operating assets. Currently the company is sitting mostly on cash, some other assets and some contingent liabilities associated with the sale.

The delisting process should take about 3-7 months. The current stock price is below the delisting floor price that the company can offer from a regulatory perspective. The stock is trading about 9% discount to the realisation value quoted by the promoters (acquirers of the public stake) and 50% discount to the book value. I estimate that the delisting final price should offer at least a 30% upside – not bad for a 3-7 month trade. The catch here is liquidity - liquidity is not great but on some days the stock can trade around $1mm.

Brief summary of the company and events taken place to date:

Claris used to be a one of the largest sterile injectables manufacturing companies in India; used to generate about 30% of revenue from the US market. The holding company, Claris Lifesciences Ltd, used to own 100% stake in its subsidiary Claris Injectables Ltd (CIL) and a 20% JV in Claris Otsuka (JV with Otsuka Pharmaceutical Factory and Mitsui & Co Ltd). In July 2017, the company completed the sale of its CIL subsidiary to Baxter Group for $625mm. Separately, in Sept 2017, the company completed the sale of its JV stake in Otsuka for US$20mm. Post these two divestments, the company was left behind with no substantial operating assets. The promoter group (Athanas Enterprise Pvt Ltd), who owns about 50% stake in the company have formally announced that they would like to delist the company since the company is no longer operating in its core business and the promoters would like to use the remaining capital to undertake new ventures. The board approved the promoter’s delisting proposal on Dec 6th.

Delisting process and typical timeline:

The delisting process should typically take about 7 months. The timeline of the major events involved in the delisting process is shown below. Some of the steps could be expedited but at the same time some of the process could take longer. On average (for about 6 delisting cases I have tracked), it has taken about 100days from board approval to make a public announcement after the reverse book build. I would give Claris about 3-7 months for the delisting process to complete as I don’t see any hurdles that could drag the process.

Claris has already received board approval and has hired a merchant bank to conduct due diligence. On Dec 16th, the company announced that the bank has completed its due diligence process.  

Delisting Timeline:

Select Precedents:

Potential delisting price scenarios:

The downside scenario: Rs. 351.60-360 per share (+0.5-2.5% appreciation)

The reverse book building process will have a set floor price determined by regulations. I understand that the average of the weekly high and low of the closing prices of the equity shares of the company during the twenty six weeks or two weeks preceding the date on which the recognised stock exchanges were notified of the board meeting in which the delisting proposal was considered, whichever is higher. The promotor and the company’s accountant in their recent letter have stated that the floor price should be Rs. 351.60. My calculation of the floor price is about Rs. 360 (~2.8% higher than current trading price) – the merchant bank will make the final  determination of the floor price after the company receives the in-principal approval from the exchange. In any case, the downside we don’t make money on this trade (but the best part is that we wont loss money in the downside case).   

Base case scenario: Rs 381 per share (+9% appreciation)

The Promotes in their letter (Dec 2, 2017) to the company’s board requesting for delisting has stated that the net cash available with the company after deducting for various expenses was Rs. 381 per share (realisable value). The estimated NAV is much higher in my estimate (see below scenario). The promoters, as the acquirers of the outstanding stake, are trying to low ball the buyback price.

Upside scenario: Rs. 455+ per share (30%+ appreciation)

Based on my NAV calculation using the Sept 30, 2017 ending balance sheet figures, I estimate potential NAV of Rs 455 per share or 30% upside to current trading price. I have used a conversion factor of 90% on the Investments item which is 76% of the total assets. Using a 100% conversion factor on the investment assets would imply NAV of Rs. 508 per share or 45% upside.

Ownership Structure:

Below is the current ownership structure from Bloomberg. I would have personally liked to see more active funds in the holding to get a better deal on the tender offer.

Catalyst

Delisting process goes as planned - stock should start appreciating post letter of tender offer is send and book building process begins.