Chemeq bailed out by Japanese investor

Chemeq (ASX: CMQ) looks likely to be bailed out of its financial woes by Japanese investor Mizuho International (MZI). But the rescue comes at a price, and Chemeq must meet a string of covenants in order for the deal to continue.

Mizuho -- a subsidiary of Mizuho Securities and part of the Mizuho Financial Group -- has signed a term sheet for the investment of up to AUD$60 million into the company.

The agreement will be finalised in February following the completion of due diligence by the Japanese financial group and ratification by a majority of Chemeq's shareholders at an EGM scheduled for late February.

Under the terms of the agreement, Chemeq will provide 40,000 convertible bonds with a value of $1000, and a conversion price of the lower of $1.10 or the volume weighted average price for the 30 ASX trading days prior to conversion. Up to $20 million more may be invested if options priced at $2.40 and due to expire on June 30, 2005, are not exercised.

And Mizuho will end up the major shareholder in Chemeq, replacing the current top shareholder, CEO and chairman Graham Melrose, with an expected equity holding of 35 per cent, and up to 47 per cent if the option underwriting goes through.

The first of the covenants requires Chemeq to secure the necessary unconditional approval for manufacturing production at its new Rockingham plant from the Australian Pesticides and Veterinary Medicines Authority (APVMA) prior to the end of May. The company received a conditional approval late last year, but has had to resolve some minor issues before gaining full approval. In addition, approval from APVMA for the supply of Chemeq's product in Australia must be achieved by mid-2006.

The company will also be required to confirm successful trialling of its product in poultry in South Africa by the end of May 2005, as well as show evidence by the end of June 2005 of confirmed orders for the sale of at least 40,000 litres of product for the 12 month period ending on June 30, 2006.

Management is another issue, with the company announcing today that it had hired a Mizuho-approved interim management consulting team headed by John Nicholls with operations, marketing and financial expertise to work with the company for at least the next six months. Mizuho will also take two seats on Chemeq's board of directors and will have veto rights over the upcoming appointments of a new CEO and CFO.

Financial performance will also be closely monitored, with the company required to gain consent for any further secured debt, in addition to unsecured debt above $200,000, and maintenance of a minimum cash balance of $25 million from the completion of the deal until July 15, 2005 and $40 million from July 15, 2005 until September 30, 2005.

Departure from these terms will see Chemeq pay Mizuho a hefty $1 million break fee plus expenses and the option to subscribe for up to 15 per cent of issued capital at the price of $1.10 for a three month period up to the end of May 2005. The same break fees apply if Chemeq decides to accept a better financial offer or if shareholders decline to accept the agreement.

Chemeq's current stoush with ASIC is unlikely to affect the deal, Melrose said, although Mizuho is awaiting a status report from Chemeq's legal counsel. ASIC has accused Chemeq of being tardy with its continuous disclosure obligations, which if proven carries heavy penalties.

"We deny the allegations from ASIC and we're going to aggressively defend them," he said.

Despite the restrictive conditions, Melrose is delighted with the offer, and expects all conditions to be satisfied.

"We're delighted to have got to this stage, and think it's a strong endorsement for Chemeq's business plan," he said. "We consider a bridgehead to have been established and now it is break out time -- we have a global product and so need global finance."