Investment Advisory Service

Tuesday, 1 June 2010

Pantaloon DVR - What an arrangement !

Pantaloon issued DVR (Differential Voting Rights) shares as bonus shares to the equity shareholders of the company in July 2008.

The DVR shares have the following terms :

  1. One DVR share carries 1/10th of the voting rights of an equity share.
  2. The DVR share is entitled to a 5% extra dividend on the face value as compared to an equity share.

The DVR share (CMP 275) is trading at a discount of 30% to that of the equity share (CMP 390). The discount may be because of variety of reasons : lesser voting rights, low liquidity etc.

I wish to highlight an anomaly which exists in the scheme of arrangement filed by Pantaloon India. Pantaloon India plans to de merge the Mall management and Project Management undertaking to Future Mall Management Ltd (FMML) and continue Pantaloon India as a pure retail play.


Interesting part of the scheme is this :

Both classes of shareholders : Equity shares and DVR shares (Class B shares) are entitled to the same number of the equity shares of the new company. There is no difference in the classes of shares issued to the equity shareholders and DVR shareholders. The equal treatment of DVR shares with equity shares should be one reason for a part of the existing discount to narrow.

The scheme doesn't elaborate on the revenues and asset/liabilities of the divisions de-merging into FMML. Reading the Pantaloon Annual report also doesn't offer much clues. 

There are trades which one could have worked upon provided there is some sanity check for the value of FMML.

  1. We could create cheaper shares of FMML by buying Pantaloon DVR shares in spot and selling Pantaloon equity shares in the futures. This would have entitled us to the same number of FMML shares but at a much cheaper acquisition cost. The selling of Pantaloon equity shares in futures will take out the market risk with regards to Pantaloon.
  2. Long term equity shareholders of Pantaloon could sell their shares and convert them into DVR shares. Once they get the entitlement of FMML shares through DVR route (30% higher number of shares), they could switch back to equity shares of Pantaloon.

However, both the above strategies might eat up most of expected profit in trading costs. Also there is a risk of the discount widening post the demerger.

Given the absence of information on FMML, I would stay away from these trades. This post is aimed at exhibiting the anomaly in the scheme of arrangement and how in this scheme , DVR shares have not been treated any differently.