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.

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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.

Comparison of 2 quasi equity securities

Preference shares are quasi equity instruments which behave partly like equity shares and partly like debt instruments. They behave like debt instruments as they carry fixed dividend rates and the dividend is paid before any dividend can be paid to the equity shareholders.

They behave like equity instruments as the dividend is to be paid only out of distributable profits of the company and the dividend is not an obligation on the company unlike a debt instrument. Also, the preference shares carry the voting rights only in certain circumstances viz. non-payment of dividend.

Network 18 Media Investments Limited is a media conglomerate which has interests in CNBC TV 18, CNN IBN, Infomedia etc. The company issued NCCPS (Non Convertible Cumulative Preference Shares) in 2008 with the following terms.

Face Value : 150

Annual Dividend : 5%

Redemption Date : May 2013

This instrument offers 7.50 bucks of dividend every year and a redemption value of Rs 150. Currently it is trading at Rs 100. The annualized yield (including dividends) at this price works out to be 27% per annum for the next 4 years. Looks very attractive given the risk-reward ratio at the current market levels.

Where is the catch ? The company has been in red for the last several years. From 2005 till 2009, the company made profit  only in one year. For the current year too, the PAT has been negative for the last 3 quarters and the way it has been going , the business doesn't seem to be breaking even any time soon. This has made the company skip the dividend for the preference shares last year and most likely the dividend will be skipped this year too. The dividends are cumulative  in nature which means that any unpaid dividends need to be paid in the subsequent years.

But the absence of profits in the company puts the dividends and the redemption, both in jeopardy. Also, given that the Network 18 group knows the nuts and bolts of financial engineering very well, the risk of change in the terms of the preference shares can't be ruled out.

With these kinds of odds against the investment , sound sleep would be the first casualty.

Let's compare that with a relatively unknown company:

Sakuma Exports is a Mumbai based export house involved in the export of various products, especially agricultural commodities. 

The company issued CRPS ( Cumulative Redeemable Preference Shares) in 2006 with the following terms :

Face Value : 100

Annual Dividend : 5%

Redemption Date: Feb 2011

This instrument offers 5 bucks  of dividend every year and a redemption value of Rs 100. Currently it is trading at Rs 90. The annualized yield (including 2 dividends which are to be paid) at this price works out to be absolute 22% return in the next 10 months. That is an annualized yield of 26%.

The company is selling at an enterprise value of 34 crs and has cash and mutual funds of 60 crs. It's a cash bargain and the debt security of the same is available at 26% annualized yield. The total amount required for the redemption of the outstanding preference shares is 10 crs. Thus, 60 crs of cash equivalents amply cover the redemption of preference shares. In the past 3 years, the company has kept its promise of paying the dividends on time.

Moreover, look at this , this and this. The promoters' are buying the preference shares from the open market . This provides a lot of comfort for the impending redemption.

Variation in terms of the preference shares is a risk but given that the promoters' are buying it themselves, I would consider it very unlikely. Another risk could be the company going into losses in the coming quarters but that also seems hedged with the amount of cash the company has.

I would be very happy putting money in this security which not only provides good chances of the return on my capital but also return of my capital.

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.