Zentiva - ready to leave the stock exchange

• Brokers: "The capital increase operated by the company was done so that the majority shareholder would exceed the holding cap of 95%, which would allow them to take the company private"

Zentiva SA (SCD), the former Sicomed, is about to leave the Bucharest Stock Exchange (BVB), given that the majority shareholder, Zentiva Group, has reached a stake of almost 95.95% of the share capital of the drug maker through a series of capital increases, above the 95% cap that allows delisting from the BSE.

A broker with over 20 years experience in our stock market told us: "The actions of the majority shareholder lately point towards the company going private, which is likely to happen".

It is a process that became clear in December 2017, when Zentiva NV, then controlled by French Sanofi, announced that it intended to start a takeover bid, after, receiving commitments to sell for 10.45% of the shares of the Bucharest drug manufacturer, at a price of 3.5 lei / share, up 40% over the December 13 price for the SCD stock, the day before the announcement.

The size of the sellers' blocks pointed to NN Group pension funds and to Finnish investment fund KJK Fund II SICAV-SIF, which had previously been unhappy with the way the company was managed, which had led to a lawsuit being filed.

During the operation, which concerned 18.32% of the capital of Zentiva SA (the whole block that at that time was not owned by the majority shareholder and by those with whom it operated in concert), 11.56% of the company's shares were subscribed, as the mentioned funds made their exit from the company, and the group acting in concert with the majority shareholder reached a stake of 93.25% of Zentiva SA.

In fact, even the prospectus mentioned that, once the bid was done, Zentiva NV intended to take the company private.

Later, in December 2018, Zentiva Group, now owned by American private equity fund Advent International, issued a public bid for 6.73% of Zentiva SA shares (at a price of 3.7452 lei / share, about 1% over the market price), but only managed to purchase 0.048% of the securities (the equivalent of a subscription rate of just 0.71% of the offer), and reached a stake of 93.32% in the drug manufacturer.

The very low subscription rate is explained by the existence of the Sicomed shareholders, who were granted shares through the Mass Privatization Program (the so-called "vouchers"). Some are no longer alive, others do not even know they own these shares etc", the broker says.

Then, in early July 2019, the company launched a share capital increase, via cash, for a maximum amount of 30 million lei, by issuing a maximum of 300 million shares, at the face value of 0.1 lei, following which Zentiva Group came to own 95.95% of Zentiva SA.

Because they failed to exceed the 95% stake through the public bid, the capital increase method was used. Every shareholder had the right to subscribe in the operation, but, because of those same reasons that the subscriptions in the public offer were very low, the participation rate in the share capital increase was low as well. Thus, the stake of the majority shareholder in the capital of the company increased and exceeded the threshold of 95%. Now, Zentiva Group can trigger the delisting".

Dragoş Mesaroş, head of trading at Goldring, agrees.

"It is clear that it was a method by which the majority shareholder could exceed 95% in Zentiva, which would allow them to delist the company".

I do not know if it is advantageous or not to delist the company for the majority shareholder, but now it has the ability to do it", the head of the Târgu Mureş brokerage firm said.

So far, Zentiva Group has not started the delisting procedure.

In order to take the company private, the majority shareholder must launch a public takeover bid, for 4.014% of the company's shares (according to the latest report on the shareholder structure), at a price at least equal to the highest price paid by Zentiva Group during the twelve months prior to the offer or at the weighted average trading price, for the last twelve months prior to the offer.

After the offer ends, Zentiva Group may ask those who did not subscribe during the transaction at the bid price, to sell their shares, at the price offered during the capital increase, if the subscriptions exceed 90%, i.e. about 3.62% of the company's share capital.

The odds of that happening in the takeover bid are low, which means that the price at which the squeeze-out operation will happen (procedure by which the majority shareholder buys the shares of the minority shareholders, without the need for their approval, in order to acquire complete control of the company) will be determined via an expert's evaluation.

Many Romanian companies have shareholders with very small holdings as a result of the Mass Privatization Program, and they are either unaware they own those shares or they are dead (...) and companies use the squeeze-out to clean up their shareholder structure. On the other hand, when the majority stake exceeds 95%, the power of the minority shareholders is very low. They are not even allowed to request the inclusion of items on the agenda of the General Shareholder Meeting. It is a legal method for shareholders to be removed from the company, at a price that is considered fair", the broker, who wished to remain anonymous, said.

It remains to be seen if, when and at what price SCD shares will be removed from trading, and Zentiva SA will be removed from the BSE.

The Bucharest drug maker was listed on the BSE in 1998 and, at Friday's price of 3.13 lei / share, has a capitalization of 2.181 billion lei.