Clearwater Capital is investing Rs 35 crore in diversified company Oricon Enterprises (formerly Oriental Containers) through fully convertible debentures (FCD). Mumbai-based Oricon Enterprises manufactures a range of packaging products besides having exposure in specialty solvents.

But Clearwater could be looking at a different play in Oricon as the company is merging two other companies (Zeuxite Investments and Naman Tradevest) with itself, making it a logistics-cum real estate entity.

What is significant is the quantum of equity dilution that would happen when the debentures are converted into equity. As per the deal, Clearwater will subscribe to 2.18 million FCDs at a price of Rs 162.20 per debenture which will be converted into equity within 18 months from the date of allotment. The issue, which is subject to approvals, is through Clearwater Capital Partners Singapore Fund III Pvt. Ltd.

Currently, the promoters of Oricon hold 54% in the company which would come down to 45% after Clearwater converts FCD into equity.

The total outstanding shares of the firm is 9.6 million and assuming no change in capital base within eighteen months when Clearwater will convert debentures into shares, it would end up holding close to 18% stake post dilution. This is above the trigger point of 15% beyond which an investor has to make a mandatory open offer to the shareholders to acquire another 20% of Oricon.

But, considering that most financial investors are never keen on such a scenario unless they are looking at a buyout, this case throws up a few other possibilities. One, Oricon could come up with a fresh equity infusion either by the promoters or through a public issue or another preferential allotment to a separate investor which can add to the capital base and limit the equity exposure of Clearwater below the 15% mark, after conversion of FCD into equity.

Two, expansion of equity base through reverse merger of other large companies with Oricon which substantially expands the equity capital and limit Clearwater’s eventual exposure.

Interestingly, one of the existing shareholders of Oricon is Beaumaris Investments, which holds close to 10% stake in the company. The parentage of Beaumaris Investments is not clear but this firm was stated to be a person acting in concert with Clearwater Capital Partners as per a disclosure when Clearwater hiked stake in another listed Indian company Diamond Cable.

If we combine the holding of Beaumaris with Clearwater (after it converts FCDs into equity), then the duo will own 27% in Oricon post the equity dilution. Add to it the open offer scenario and Clearwater along with Beaumaris could end up owning close to what the promoters hold, if the equity capital doesn't expand significantly to prevent such a situation and the open offer clause.

For the year ended March’09 Oricon had consolidated revenues of Rs 240 crore with a thin margin having just about Rs 6-7 crore in net profit largely because a chunk of revenues is from trading business. But this could change significantly going forward. 

The street already had a knowledge of the moves which explains how Oricon scrip has shot up almost nine times since March’09. Zeuxite, one of the firms Oricon is looking to merge with itself, holds 50.19% in United Shippers Ltd (USL) that is engaged in the business of lighterage, stevedoring and logistics with consolidated revenue of Rs 491 crore and net profit of Rs 33 crore for the year ended March 31, 2009. USL operates through ports in Gujarat, Maharashtra and Goa. It has a wholly owned subsidiary in Dubai besides various joint ventures and counts amongst its strategic investors Oxbow Coal of USA, Logiscor Ltd and Italy’s Coeclerici Logistics S.P.A.

Naman Tradevest in turn holds 62% in National Cotton Products Pvt. Ltd (Oricon owns the balance 38%). National Cotton owns plot measuring 7,080 sq. meter in prime location of Worli in Mumbai and plans to redevelop the plot into a commercial cum residential complex with a school on the same plot.

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