Hiranandani Battle

Mint reports about the ongoing family dispute in the high profile Mumbai based real estate developer : Hiranandani Group. With the group patriarch and his son on one side and the daughter on the other; gone are the days when the family disputes used to be domain of only the males of the business families.

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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.

Sakuma & Network 18- Updates

My earlier post about Sakuma Exports and Network 18 is here.

Sakuma Exports declared a dividend of Rs 5 /- for the year 2009-10 on the preference shares. Read here. 

I believe the company is on its way to redeem the preference shares in February 2011 or may be earlier if it wishes to.

In Network 18, my worst fears turned out to be true. The company came out with a postal ballot and sought to waive the voting powers on the preference shares which would have accrued since the dividend has remained unpaid on the preference shares for 2 years. The Network 18 group is never short of aces up its sleeves when it comes to dealing with the minority shareholders.

You can read the postal ballot here.

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.