Debtors threaten to seize control of Elan

BONDHOLDERS in Elan owed in excess of €1 billion may take control of the company if Elan's share price does not rise significantly when the debts mature in December 2003.

If Elan fails to pay off this debt then bondholders can convert the debt to shares. If Elan's market capitalisation was to remain anywhere close to the 640 million euro it fell to yesterday then a conversion of the bondholders debt of 1bn euro to shares would given them full control of the company at the end of 2003.

Merrion stockbrokers analyst Peter Frawley said: "Elan has failed to provide the necessary clarity on future cash flows, which is needed to arrest our concerns surrounding the group's ability to repay the $1bn Liquid Yield Option Notes (LYON) debt due in December 2003 and provide comfort on the group's continuing liquidity beyond that".

"The management intention to raise an additional $1bn in funds from asset sales looks a very ambitious goal in light of our recent analysis of Elan's investments portfolio, which showed the majority of Elan's investments are small biotech and pharma companies."

These will not be easy to dispose of, especially in light of the current pharma backdrop and Elan's current lack of bargaining strength.

"Even in a best case scenario if Elan can achieve $1bn in asset sales and there is no further cash burn from operating activities between now and 2003, which may be unlikely given the uncertainties surrounding the effect on cashflows from generic competition and securitised royalties the company faces up to $950m in future cash commitments over the next 18 months, which will leave the company little scope to repay the full $1bn LYON in cash in December 2003, thereby increasing the chance of the bondholders having a significant controlling interest in the company."

Mr Frawley leaves little doubt about Merrion's current thinking on the Elan shares. "With the continuing lack of visibility on cashflows, investors cannot approach this stock with any degree of confidence avoid."

Goodbody Stockbrokers analyst Ian Hunter was not impressed by Elan's utterings either saying there was little new information forthcoming from the Elan conference call on Tuesday.

"On the SEC (Securities and Exchange Commission) investigation, Elan would only comment that it was ongoing and that it was replying to all SEC requests," he said.

Mr Hunter is more optimistic on Elan's ability to repay debt. "From information currently available, we estimate that Elan can still afford to take an up to 50% write-down in asset value and still be in a position to service its debt through to 2004."

Both analysts said the search for a new chief executive to replace Donal Geaney, Elan's former chairman and chief executive, and his deputy, Tom Lynch, who resigned suddenly on Tuesday, is another worry for investors.