Great Offshore- More than meets the eye

I did some more thinking on ABG Shipyard's sale of its holding in Great Offshore. As long as ABG sold its stake in Great Offshore on the stock exchange,  it seemed a clear case of ABG leaving the game.

But Edelweiss buying that stake from ABG doesn't go down very well. Why would Edelweiss, where " Ideas create, Values Protect" buy into this company and that too for an arbitrage. Buying the stake at 570 and planning to tender it at 590 in Bharati's open offer with a low acceptance ratio doesn't seem to be an attractive trade for Edelweiss to be in. Surely , there is much more than meets the eye.

What if ABG is still in the race to acquire Great Offshore ? There is no company announcement from ABG that they have withdrawn from the race. It's possible that stake sale to Edelweiss has provided the liquidity to ABG to further revise its open offer price. Though a low probability event, this cannot be ruled out.

Dec 11 is a crucial date for that is the date by which both the acquirers can revise their open offer prices. 

Disclaimer : The above post is just an analysis of the dynamically changing situation in Great offshore. It's not a recommendation to buy or sell shares in any of the involved companies in this transaction.

Great Offshore- ABG call it quits

ABG sold its close to 8% stake in Great Offshore on the exchange. 

The announcement can be read here.

ABG and Bharati seem to have joined hands at the negotiating table. It has saved headache not only for Bharati and ABG but for SEBI and the other regulators as well.

This means that ABG is out of the race for Great Offshore and Bharati is going to be the uncontested suitor. Though ABG is out but the open offer made by it cannot be withdrawn . So, both the open offers made by ABG and Bharati would run simultaneously.

The contours of the deal seem to have been drawn in a manner to make sure that the financial liability on ABG is as low as possible. The offer by Bharati has been raised a bit to ensure that the difference in the open offer prices of ABG and Bharati is large enough for shareholders to tender their shares in the offer made by Bharati.

One aspect of Takeover Code which gets clarified is that in an open offer made by the acquirer, the acquirer is free to sell its existing holding in the target company during the pendency of the open offer.

Great Offshore- Update

Bharati makes the task difficult for ABG.

Should ABG quit the game now ?

1. ABG has been successful in making the acquisition expensive for Bharati by successively increasing the offer prices earlier.

2. If ABG were to increase the price now, it will end up with control and a higher stake but would have to stretch its massively leveraged balance sheet a bit more.

3. With Bharati getting close to 26% in Great Offshore, it will continue to be a pain for ABG.

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.

Tragedy Of Commons

While Ambani Brothers are fighting out in courts, I came across this where no body cares about the gas.

Nobody owns it , no body cares for it .

Perfect example to understand the difference between capitalism and socialism.

Businesses I Like

Note on Zydus Wellness Limited   (16.07.2009)

Business

• Zydus Wellness (ZW) is a company formed out of a scheme of arrangement between Carnation Nutra- Analogue and Cadila Healthcare Limited.  The consumer products division of Cadila Healthcare was demerged and transferred to Carnation Nutra, whose name was later changed to Zydus Wellness Limited. The scheme has come into effect from April 1, 2008.
• The company is into the business of innovating and developing niche wellness products which can be categorized into "preventive medicare".
• ZW has 3 brands in its portfolio : Nutralite , Sugar Free and EverYuth.
• Nutralite is a premium table spread margarine which is a leading butter substitute. This table spread is made from pure refined vegetable fats which are free from transfats and hydrogenated fats. Sales of this brand was 66 crs in FY 09 which grew at 20% compared to FY 08.
• Sugar Free is India's largest selling low calories sweetner with a market share of 80%. Sales of this brand was 77 crs in FY 09 which grew at 16% compared to last year. It is available in 3 variants :

• Sugar Free Natura : Sucralose based and made from sugar. 
• Sugar Free Gold : Aspartame based sugar substitute molecule.
• Sugar Free De'lite : Ready to drink and powdered soft drink concentrate. 
• EverYuth is into speciality skin care products. The company calls this segment cosmeceuticals. This consists of soap free face-washes, face masks and scrubs. It is market leader in scrubs with 69% market share and peel offs with 98% market share. The total sales of this brand was 50 crs ; up 66% from last year.

Valuations

• No of shares        : 3.907 crs 
• CMP                 :  120
• Market Cap          : 469 crs 
• Borrowings          : Nil
• Cash & others       : 51 crs
• Net Sales           : 196 crs
• EBITDA             : 39.8 crs
• EBITDA %           : 20.3 %
• Dividend           : Rs 1.50

Positives

• The company has strong brands with top of mind recall. Brand building exercises are undertaken by the company which include high expenditure on advertising and celebrity endorsements. Current brand ambassador for Sugar Free is Bipasha Basu. In the past, in film brand placements have been done for Sugar Free in Amitabh Bachchan's movie " Cheeni Kum", titled appropriately for the company.
• ZW is innovative in finding the gaps in the consumer needs and the products available. The products are envisaged and the brands are developed by the company while the manufacturing is outsourced to third party manufacturers. This limits the capital employed by the company in the business.
• The business generates very high return on capital. The total capital employed in the business is 70 crs ( 39 crs in Net fixed assets and 31 crs in Net current assets) and the cash generated from operations for FY 09 is 61 crs. Subsequent performance has to be observed to find the sustainability of such high returns on capital.

Concerns

• Price undercutting by new players is big concern. The products can be easily copied.
• Commanding prices are enjoyed by large retail chains like Barista ,Cafe Coffee Day etc which are big consumers of Sugar Free.

The business looks very interesting with solid brands, high margins and high ROCE. The category in which the company operates should enjoy high growth rates and the company's brand being the leaders should grow commensurately. The key being in maintaining the brand leadership and brand recall which the company is managing pretty well.

The valuations are expensive at this time but definitely a company to be kept on the radar.

Macmillan India Promoters train guns at minority shareholders

In one of his letters to the shareholders of Berkshire Hathaway, Warren Buffett remarked “It has been far safer to steal large sums with a pen than small sums with a gun”. The promoters of Macmillan India Limited are on their way to substantiate that remark.

Recently, Macmillan India Limited, a company listed on the BSE and the NSE announced a scheme of arrangement and demerger. Under that scheme, the company has proposed to separate its businesses of book publishing and publishing services in two different companies. The book publishing division would stand demerged into a new company Macmillan Publishers India Limited (MPIL) and the publishing services business would continue to remain in Macmillan India Limited (MIL), which is the parent company. The scheme proposes that for every 1 share held by the shareholders in the parent company MIL, 1 share of the new company MPIL will be allotted to them.

So far, so good. Now comes the twist in the story. The new company MPIL will NOT be listed on any stock exchange! Moreover, the ONLY exit opportunity available to the minority shareholders is to sell their shares to the promoters.

I reproduce clause 18 from the scheme of arrangement:

“Since MPIL will not be a listed company, the members of MIL,......., shall have the following options:

a. they can retain the UNLISTED shares in MPIL issued and allotted to them; or

b. they can offer to sell their shares in MPIL to the Promoters at Rs 69 per share as decided by the Board based on the Valuation Report submitted by an independent valuer, Pricewaterhouse Coopers Private Limited

c. to facilitate the members it has been proposed that in the event a member does not exercise either of the options over during the period of 3 months, it shall be taken that such member wish to effect the transfer and assignment of the shares to the Promoters against the remittance of the price to the members concerned to be paid by the Promoters.”

I was shocked to read this clause. Inbuilt in this clause are three aspects which, taken together, are functionally equivalent to putting a gun on the minority shareholders' heads.

1. The promoters are creating an unlisted company out of a listed company.
2. The minority shareholders are being offered a fixed amount of Rs 69 per share.
3. Negative consent is required from the shareholders.Those shareholders who do not wish to sell their shares to the promoters have to inform the company. In absence of any communication from the shareholders, it will be assumed that the shareholders wish to sell their shares to the promoters.
   
   SEBI Delisting Guidelines have been framed to protect the interests of the minority shareholders in case the promoter wishes to take the company private. Macmillan promoters have bypassed these guidelines and are demerging a profitable operating business into an unlisted company. If it becomes so simple to take the businesses private, it would become free for all. Later on, we might come across a scheme where the promoters of a listed company demerge almost all the operating assets into an unlisted company leaving only the shell company for the shareholders.
   
   Read what the promoters’ think of their book publishing business “With among the best product in the market and focus on the large and growing educational market, the publishing business grew significantly. Acquisition of Frank Bros (a leading local educational publisher) has put MIL in a leadership position in the national boards educational market” (source:www.macmillanindia.com)The promoters acknowledge that the book publishing business of Macmillan India is in a leadership position.
   
   The valuation of Rs 69 a share by the independent valuer reminds me of the famous joke on accountants. A potential employer asked the candidate “How much is two and two?” The candidate who was an accountant replied “How much do you want it to be?” I think the valuation reports are an eye wash and not even worth the paper they are printed on. If Rs 69 per share is the fair valuation for the book publishing business, will the promoters’ sell their shares at Rs 69 a share if there were somebody willing to buy them out? After all, this valuation of Rs 69 a share has been calculated by an INDEPENDENT VALUER.
   
   Why has the negative consent being put up in the scheme of arrangement where no response from the shareholder on the offer to sell the shares will be taken as acceptance of the offer? Many of these minority shareholders will not even receive the communication from the company and many of those who will, may not understand the consequences of their inaction.
   
   I think the promoters of Macmillan India Limited are stealing from the minority shareholders a highly profitable business of the company. The regulatory authorities should pull up their socks, discharge their fiduciary responsibilities and thwart the attempts of the promoters to short change the minority investors.
   
   Disclaimer:
   Neither me and my family nor my employer hold any financial interest in this company.