What's happening at R Systems ?

One, Mr Bhavook Tripathi (BT) has made an open offer to the public shareholders of R Systems International Limited. The open offer is interesting as it appears to be a hostile bid. Mr Tripathi has been buying the shares of the company from the open market since July- August 2010 and it took him almost 16-17 months to acquire a 22% stake in this company. Under the recently amended take over code, the open offer has to be made if the shareholding of the acquirer crosses 25% and the open offer has to be for 26% of the the fully diluted equity capital.

Is the company vulnerable to a hostile take over ? From the prima facie look of the shareholding pattern, this doesn't appear to be the case. As per the Sep'2011 shareholding pattern of the company, there are 1.23 crs shares outstanding and the promoters own 47% of the company. Doesn't look like that the promoters could be thrown out unless one of the promoter groups is trying to perform a coup with the help of Mr Tripathi. At most, Mr Tripathi can call a meeting of the shareholders and get on to the board and be a constant PITA (pain in the ass) for the promoters.

Incidentally, BT has an interesting precedent to prove his prowess. He and some other persons acting in concert forced Abbott US to pay up a higher open offer price post to the acquisition of Solvay Pharma. In Sep 2009, Abbott Labs US decided to buy world wide operations of Solvay Pharma wherein the Indian operations of Solvay also got acquired indirectly by Abbott. The price of Solvay India was around Rs 900 per share then. As per the Takeover code in India, in indirect acquisitions the acquirer can make a public announcement for an open offer to acquire 20% of the total outstanding shares from the public shareholders within 3 months of the consummation of the deal. Consummation is important because it means when the global deal has got all the regulatory approvals and anti trust approvals or whatever the case may be from all the countries where the operations of the target company are situated. That is a time consuming task by all standards and that provided a perfect hunting ground for Mr Tripathi. He kept on buying shares of Solvay Pharma from the market every day at higher prices. 

The public announcement for the open offer came on Feb 17, 2010 which was a good 5 months after the acquisition. By that time, Mr Tripathi and PACs had acquired more than 7% of Solvay and they had taken the price up to Rs 3000. As per the takeover code, the open offer has to be priced at an average price of 26 week or 2 week period (higher of the 2 prices) prior to the public announcement of the open offer. The open offer was thus priced at Rs 3054.

The 7% stake held by BT and PACs amounted to 107 crs. Even if the average price for Mr Tripathi was half of the offer price, he stood to make a neat 50 crs in this deal. So he is not new to the intricacies of the take over code. Even in R Systems, he might have a well planned exit.

Coming back to R Systems, the promoters own 47% and Bhavook owns 31% (he bought more after making the offer). Remaining public float is 22%. The open offer is for 26% of the shares. Essentially, all the shares should get accepted in the offer. The open offer price is 122 and the current market price of R Systems is 131. Looks like a very attractive place to park cash. On the downside , one may have a maximum loss of  9 bucks and on the upside the appreciation could be good given that one will be riding the coat tails of Mr Tripathi. 

I haven't done a detailed analysis of the intrinsic value of R Systems but the company is debt free and has 75 crs of cash in the books as of June 2011. The market cap of the company at the price of 131 is 160 crs.

Since the announcement of the offer, the promoters have also joined the fray and they are also buying shares from the open market. The company has announced plans to divest some non core assets etc.

What might be the risks associated with this deal ? One risk could be the time delay. The battle continues to go on between the promoters and BT and nothing comes out of it for a good long time. Second risk which my colleague Arpit pointed out was that the promoter(s) reach an agreement with BT and sell their own shares to a third party which further tenders into the open offer. That will reduce the acceptance ratio for the minority shareholders and hence there might be losses more than Rs 9 per share. Fair point but we agree that that might be a low probability event. Third risk could be that promoters transfer the cash and other attractive assets of the company by way of a loan or some other agreement thus reducing the value of R Systems. But that might be difficult as BT owns 31% of the company and he can block any special resolutions. Any thoughts what other risks might be there in this transaction ?

I haven't put my money into this and am still sitting on the sidelines. It will be interesting to watch the outcome of this. Whether this deal goes on to cement BT's reputation of a clever strategist or he faces the fate of Mahabharata's Abhimanyu in the chakravyuh :  easier to get in, difficult to get out.