Investment Advisory Service

Saturday, 28 November 2009

Great Offshore- Game Theory Problem

Great Offshore open offer has become an interesting game theory problem.

In June this year, Bharati Shipyard invoked the shares pledged with it by the promoter of Great Offshore. As a result, it had 14.89% stake in Great Offshore. Though the Take over code was not triggered, Bharati came out with a voluntary open offer of 20% under Regulation 10 of the Take over code to consolidate its shareholding in the company. If the offer were to fully subscribe, it would take Bharati's stake to roughly 34.5%.

Within days, a competitive offer was made by ABG Shipyard. ABG was holding 2% stake in Great Offshore at the time of the announcement of the offer. Under the takeover code, the competitive bidder has to make an offer for a stake which combined with his existing holding , matches the possible stake of the first bidder under the condition of its successful offer. Thus ABG came out with an open offer of 32.5% under Regulation 12 of the Take Over Code.

Regulation (10):

"No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen percent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations."

Regulation (12):

"Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the Regulations."

The difference between these regulations is the control angle. Offer under Regulation (10) would be without the control of the target company while the same under Regulation(12) will entitle the acquirer control over the target company.

Here is how Takeover Code explains the meaning of control :

"Control includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner majority of directors on the Board of the target company or to control management or policy decisions affecting the target company."

Subsequent request by Bharati Shipyard to incorporate an amendment and make the offer under both, Regulations 10 and 12 was turned down by SEBI. Since the original announcement was made under Regulation 10 , the offer by Bharati was to proceed under the same regulation. 
After a couple of rounds of revision in offers and buying of shares from the open market by both the parties, this is how things stand as of now.

  1. Bharati Shipyard holds around 22% stake in Great Offshore. The open offer size is 20% , priced at 560 and made under regulation 10.
  2. ABG Shipyard holds around 8.5% stake. The open offer size is 32.5% , priced at 520 and made under regulation 12.
  3. SEBI has cleared both the offers and both the offers would open and close on the same dates. The shareholders can thus tender their shares in either higher acceptance ratio ( ABG) or higher price ( Bharati) or partially in both the offers.

For the acquirers, it is a prisoners' dilemma :

Bharati is has around 22% stake in Great offshore, very close to the magic figure of 26% where it will be able to block the special resolutions making the task difficult for ABG. However, without the control it might have to sit on the sidelines calling fouls and blocking resolutions. It also runs the risk of losing a lot of business from Great Offshore and locking up borrowed money into a potentially long term investment. The strategy of Bharati would be to make it difficult for ABG to up its stake. The only way to achieve it is to keep its offer price above ABG.

ABG has only 8.5% stake as of now. Its offer is priced lower than Bharati which means a lot of shares could end up being tendered in Bharati's escrow account. Also, this is the only chance with ABG where Bharati is being asked to run with its feet tied since it cannot acquire control.  If ABG gets control but ends up with very low stake, it might end up with an asset purchased at an exorbitant price but not in a position to maximize the benefits out of it. The only way to resolve that is to increase the offer price beyond Bharti's offer price and subsequently have a higher stake in the company.

With both the offers opening on Dec 3 and closing on Dec 22 with the last date to revise the offers being Dec 11, I think we will see some interesting situation unfolding in Great Offshore , both in the market and off-market.