delisting - an unfair binary game

Ashish Kila

Perfect Research

Our Chairman - Mr. R.A. Kila

Perfect Research Team

Delisting Deadline – the right noises being made What has changed from last year

Old Vs New Takeover Regulations

Current delisting cases

Delisting Bubble– what burst it? –

Highly anticipated candidates Opt for offer for Sale

Our learning..2 themes

1st Companies with promoter holdings >85 % and valuation comfort

2nd MNC’S bullish on Indian business and heavy capex lined up

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In 2010, SEBI came out with norms saying government firms should have a minimum public shareholding of 10 per cent and the private companies 25 per cent. These guidelines were to be complied within three years.

While the private companies have to meet norms by 3rd June, 2013, for PSUs the deadline is 8th August, 2013.

As we seen only a few PSU are left for compliance. So, the chances of extension are very less.

In Recent interview SEBI Chairman Mr. U.K. Sinha said that India Inc has no choice but to comply with minimum public shareholding norms of 25 per cent by June 2013.

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(LINK)

(LINK) (Link)

(Source : Ace Equity)

Delisting Deadline – the right noises being made

What has changed from last year







MNC’S bullish on Indian business and heavy capex lined up

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Old VS New Takeover Regulations

After open offer, if the acquirer crossed minimum public

shareholding of 75%

◦ Then the acquirer had the option to directly get it delisted

◦ Or bring the shareholding down to 75% of issued capital of

the target company

E.g. : Styrolution ABS (India) Limited

Link: http://www.sebi.gov.in/cms/sebi_data/commondocs/act15a_p.pdf

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Subsequent to completion of offer, the acquirer and PAC may also

exercise the option of delisting the shares of target company

following the procedures stipulated under SEBI (Delisting of equity

shares) Regulations, 2009 subject to various factor including the

financial position of acquirer and the PAC, prevailing market and

economy conditions, market price of Target company and

regulatory framework of delisting.

Link - BSE

After open offer, if the acquirer holding crosses the 75% of total

Issued capital of the company

◦ It is compulsory for acquirer to bring shareholding down to 75%

with in one year

◦ Acquirer cannot delist directly without bringing shareholding to

75%

E.g:- Gujarat Gas limited, Thomas Cook (India) Limited

Link: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1316778211380.pdf

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In the event that post offer shareholding of the Acquirer and PAC in the target company exceeds

the maximum permissible non – public shareholding under securities contract (Regulation) Rules,

1957, as amended (SCRR), the Acquirer undertake to reduce its shareholding to the level

stipulated in the SCRR within the time and in the manner specified in the SCRR and the listing

Agreement. Link - BSE

The acquisition of 24.17 % of the eligible paid up equity share capital of TCIL and stock options, as

eligible pursuant to the SEBI( SAST) Regulations, under this offer, together with the equity share

being acquired under SPA, will result in the public shareholding in TCIL falling below the level

required under listing. To the extent the post offer holding of the Acquirer in TCIL exceeds the

maximum permissible no public shareholding under securities contracts (Regulations) Rules, 1957,

as amended (SCRR) the Acquirer undertake to reduce its shareholding to the level stipulated in

the SCRR within the time specified in the SCRR and the listing agreement. Link - BSE




Current delisting cases Delisting Bubble– what burst it? –




2nd MNC’S bullish on Indian business and heavy capex lined up.

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APW designs and manufactures standard and customized racks and

enclosure, particularly for IT and telecom firms.

Promoter-Schneider Electric India holds 75% of its stake.

Incentive to delist:

Legally not obligated to delist as public holding is 25%.

Promoter on acquisition spree in India and almost all acquisitions were

privately held companies or particular businesses to be kept private.

Examples of previous acquisitions:

◦ Mumbai-based Zicom Electronic Security Systems (2010)

◦ Bangalore-based Conzerv Systems (2009)

◦ Bangalore-based Meher Capacitors (2009)

◦ Chennai based S&S Switchgear (2000)

◦ Nashik based Crompton Greaves Low Voltage division (2000)

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APW Promoter(Holding 71.3%)

Schneider(Acquirer

Holds 75%)

Non Promoter Holds 15.3%

Public Sharehoding

(28.7%)

Acquire 55%

Acquire 20%

becomes

SH1 SH2SH3

Tender in Delisting

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No. of Shareholders

FII & DII 0 0Body's Corporate 82 8.30%

Individual shareholders (nominal share capital >1 lakh) 10 3.65%

Total 57 11.95%

Smart Investor % Shareholder's holding more than 1% shares

(as on Sep-2012) Globe Capital Market Ltd 113,946 1.88%

APW Electronics Group Ltd 169,211 2.80% Total 283,157 4.68%

No. of shares% of shares

held

Promoter holding 75%Required for Delisting 15%

3.05%(15%-11.95%)

Retail (Ex smart investors & NRIs) 10.20%30%

(3.05%/10.25)

Required from retail

Percentage of Retail tender required

Note:- Excluding Rajasthan Global Securities Ltd and Globe Capital market Ltd all other are earlier promoters of the company.

Percentage public holding in more than 1% category

Dec-11 Mar-12 Jun-12 Sep-12

APW Electronics Group Ltd 6.67% 6.67% 6.13% 2.80%

Globe Capital Market Ltd 1.66% 1.88%

M Rutty & Co. Ltd 2.51% 2.51%

Rajasthan Global Securities Ltd 1.12%

Markarand Ashok Kunte 1.09%

Elijah Aaron Elias 1.24%

Sarojini Ashok Kunte 1.30%

Sudhir Seth 2.35%

Total 15.16% 11.96% 6.13% 4.68%

No. of shareholders 6 4 1 2

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Hints of Dispersion

Hints of Dispersion

Promoters start dispersing holdings between Jan’12 to Jun’12 after

announcement of delisting.

However, the quantity doesn’t get distributed in retail rather from the

top 300 shareholders list, once can gather that first 40 shareholders

(excluding promoters) would be sufficient to make this delisting

successful.

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SEBI is getting strict on delisting where price of delisting seems

fixed as in case of Nirma Limited.

Promoters would like to leave a little premium on the table.

The Average traded price in APW during dispersion period is Rs.

220/shr.

Shareholders who bought these shares at Rs.220 ought not to bid

at Rs.195 per share and make losses.

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Total number of Shares required for delisting - 9,07,200 (15%)

Votes casted in postal ballot – 8,72,415 (14.42%)

Shareholders who have bothered to participate in postal ballot

process will definitely participate in delisting process.

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In Indian Corporate history, only TTK Prestige limited did not take

the action on delisting process after passing resolution from

Shareholders. But it was under the old delisting guidelines in which

there was no time limit for taking the action on delisting process

after passing special resolution from shareholders. (Link)

In APW Case, it is under new delisting regulation and here the time

limit is one year for taking the action on delisting process otherwise

new special resolution will be required to pass from Shareholder.

(Link)

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APW is available at a market cap of Rs.123 cr and an EV of about Rs.136 cr.

FY12 revenue were Rs.100.34 cr, while there was a loss of Rs.5.78 cr at the PAT level. So it looks the valuations expensive.

Prior to the acquisition, however, the company had PAT of Rs.9.21 cr in FY09 and Rs.5.4 cr in FY10.it shows that company has the potential.

The promoters’ holding is 75%.and if delisting fails price will come down drastically because promoter have no legal compulsion.

As per our talk with company secretary and Merchant Banker we haven't been able to get any update why the reverse book building process hasn’t been initiated yet?

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The company was engaged in the manufacturing and marketing of Vanaspati, bakery shortenings, refined and filtered edible oils and other FMCG products.

The company sold its core edible oils business - along with its manufacturing plant on slump sale basis for Rs. 221 cr in Feb-12.

Of which the company distributed Rs. 44 cr as dividend. Promoters announced delisting in Sep-2012. Incentive to delist: Core business sold to exit from the business. No intention of entering into another business. Company holds Rs.136 cr of net cash in accounts till March-12.

(Current Market Cap – 107 cr)

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The Shareholders in more than 1 % category are likely to be related to promoters because they also holds substantial holding in Other promoter group company i.e. Amrit Corp Limited.

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From shareholding pattern it is clear that delisting is easily doable, as smart investor are sufficient to get 90% of holding.

Previously promoters have shown their generosity by paying fair amount of special dividend of Rs. 60 per share after slump sale. However, this doesn’t guarantee that payoff would be good in case of delisting too.

The Share is available at floor price Rs.142.5,we may expect some premium from this level (to avoid lawsuits from minority shareholders like in Nirma ltd delisting)

Also at this price it seems that there is little to lose like Binani Cement, you may get a small premium on your cost of holding (Binani – floor 82, investment at 81 and delisting price – 90Rs )

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Nirma ltd. has announced its delisting on October 2010. The company held 77.17 % of equity paid up-capital & company required 12. 83 % equity for delisting.

But Minority shareholders complained to the regulator and stock exchanges that the promoters had acquired a large number of the shares through persons acting in concert before the offer opened, and tendered them subsequently to complete the delisting process successfully.

As a result the regulator withheld the delisting of the company's stocks as it probes a possible violation, alleging that the delisting process was not in line with the regulations.(link)

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As we seen 47 Shareholders holds 15.27% which was more than sufficient for complete delisting. The floor is Rs.235 and delisting final discovered price Rs. 260 is not at a significant premium to the floor.

At Floor

PriceAt 25%

PremiumAt 50%

PremiumAt 100%Premium

Price per share (Rs.) 142.5 178 213 285

Cash Required For Delisting(Rs. Cr)

27 33.8 40.5 54

Rs. In Cr.

DESCRIPTION Mar-12Total Debts 0.12

Total Liabilities 145.95Investments 123.13

Long term investment (MF Units+Bond) 30.02Short term investment (MF Units) 93.11

Cash and Bank 13.36Net Cash available with company 136.37

No. of shares 0.74Cash per share (In Rs.) 185

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Chettinad Cement Corporation Limited (CCCL) was

incorporated in 1962. Its manufacturing unit located at

Puliyur, Karur in Tamil Nadu commenced production

in April 1968. The company also caters to the

neighboring states of Kerala, Andhra Pradesh and

Karnataka. Besides cement, the company also

produces ready-mix concrete.

Smart InvestorsNo. of

Shareholders%

FIIs 4 0.01%DIIs 11 3.24%

Body's Corporate 172 4.91%Individual shareholders holding

nominal share capital >1 lakh7 0.55%

Total 194 8.70%

Top 4 shareholder's holding-sufficient to meet delisting

requirement.% of Shares

Tamilnadu Industrial Investment 3.23%Original Innovative Logistic (India)

Pvt ltd1.12%

Elite Coal Terminal Logistics & Service 0.99%

Pertieland Foods Private Limited 0.86%Total 6.20%

Promoter holding 88.40%For delisting require another 5.78%

Retail holding Excluding smart investors & NRIs

2.84%

Required from retail (8.7% > 5.78%) 0%

Sufficient for Delisting

The board has approved the delisting & floor price is set at Rs 540/share

and Indicative Price is Rs.-575 CMP – Rs 800.

Delisting, very probable: Management holds around 88.5% of the equity

and needs only 5.75% of the equity to delist

Expected time : The Company announced a proposal to delist on May 15th

2012. However, its been more than four months that they haven’t initiated

postal ballot approval process.

This again reiterates the risk of investing before postal ballot approval.

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CompanyCapacity (MMT) Debt EV EV/MT

EV/tonne(USD) Net profit EV/ NP Sales EBDITA EV/EBDITA EBDITA % ROE NPM

Shree cements 13.5 400 10,106 749 165 209.0 48.4 3,558 958 10.5 27% 10% 6%Madras cement 10.5 2800 6,094 580 128 353.0 17.3 3,600 657 9.3 18% 13% 10%India cement 14 2400 5,461 390 86 330.0 16.5 3,865 980 5.6 25% 10% 9%Prism cement 7.6 900 3,323 437 96 251.0 13.2 3,410 400 8.3 12% 18% 7%Birla corp 6 -300 1,844 307 68 557.0 3.3 2,300 500 3.7 22% 25% 24%Chettinad cement 11 1000 3,290 299 66 180.0 18.3 2,060 680 4.8 33% 18% 9%JK cement 7.4 1100 2,122 287 63 180.0 11.8 2,500 400 5.3 16% 12% 7%

Comparing similar size companies in the industry, Chettinad trades at $66/ tonne.

Whereas Madras Cement, with almost equal capacity, trades at $128/ tonne

Also, new Greenfield projects cost around $160/ tonne.

Shareholder's holding more than 1% shares (as on June-12)

% of Shares

J K Modi 1.24%

Promoter holding 73.60%For delisting require (90-73.6) 16.40%

Share tender Required from retail 3.24%Retail holding excluding Smart

Investors & NRI's13%

Percentage of Retail tender required (3.24/13)

25%

Smart Investors No. of

shareholders%

DII (MFs/UTI/Insurance) 8 0.02%Body's Corporate 268 5.27%

Individual shareholders holding nominal share capital >1 lakh

81 8%

Total 357 13.16%

In case of Ricoh India, public holding is well scattered through small retail shareholders and risk appears more from the part that whether book will be built or not rather than the discovered price.

Result of Postal Ballot:-

Shareholder who bothered to participate in postal ballot will definitely tender its Shares.

Also mass participation with small holdings will most likely result in discovered price at high premium.

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No. of shares % SharesPromoter Holding 29270370 74%Non promoter holding 10497791 26%Total No. of Shares 39768161 100%Votes in postal pallot by public shareholders 5516003 14%Require for delisting 6362906 16%

At the time of announcement stock traded at the price of Rs. 46 with P/B of ~ 2 & currently trading at the price of Rs. 87.5, with P/B or 3.6.

If delisting not success than stock may correct approximately by 50%.

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Board of directors announced delisting on 4 Sept 2012 at Rs 25 per share, which was 60 % premium to current market price.

Promoter holding is 16.04% as on Sep-12 which is reduce to 9.78 % of total issued capital if all outstanding GDR convert into equity shares.

Delisting is pre condition for a transaction that promoter entered with one of FII.

The % holding of GDR’s after conversion recently in September quarter reduce from 73.44% to 39%

We will avoid this delisting and reserve any further comments

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Indo Tech Transformer limited (ITTL), a Chennai Based Company, was incorporate in 1976.The Company is engaged in manufacturing of transformer such as power, distribution and special transformer.

It is one of the leading transformer manufacturer in southern India and serve the southern state electricity board . It has four manufacturing facilities across three locations with total installed capacity of 7450000 KVA per annum.

The company derives revenues primarily from sale of transformer manufactured to state electricity board, EPC contractors, industries etc.

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As of 2012, Prolec‐GE International holds 74.35% stake in ITTL.

Prolec‐GE is a joint venture between Mexico’s Xignux and US‐based General

Electric. It is one of the largest transformer manufacturers in the USA, offering a

complete line of transformer products for the generation, transmission and

distribution of electric power with products installed in more than 30 countries.

Prolec‐GE International acquired 54.35% through share purchase agreement from previous Promoter of the company and 20% through open offer from Public Shareholder in December,2008 at Rs.406 per share.

Now the acquirer announce Rs. 120 per share as indicative price for delisting of shares which is approx 70% discounted from purchasing price in 2008.

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Delisting Deadline – the right noises being made.

What has changed from last year.

Old Vs New Takeover Regulations.

Current delisting cases.



Our learning..2 themes.

1st Companies with promoter holdings >85 % and valuation comfort.


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Delisting Bubble- What burst it?

Highly anticipated candidate opt for “ offer for sale”.

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Delisting-First nail into delisting saga

Fresenius kabi oncology was one of the delisting candidate with more than 90 % of promoter holding.

News for delisting were rampant in the market too.

At that time valuation was so high, stock traded at ~ Rs 160 with ~ PE of 45.

In the mid of ongoing rumors promoters announced “ open for sale” on 30 May 2012 and stock falls ~41 % as of now.

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Our learning..2 themes Our learning..2 themes


MNC’S bullish on Indian business and heavy capex lined up

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Campany NameForeign

Promoters Holding

Holding Required For

DelistingTTE PE

BOC India Ltd. 89.48% 5.26% 34.26

Disa India Ltd. 86.49% 6.76% 18.25

Elantas Beck India Ltd. 88.55% 5.73% 41.46

Kennmetal India Ltd. 88.16% 5.92 31.31Styrolution ABS(India) Ltd. 87.33% 6.34% 25.1

Note;- Sah Petroleum foreign promoter Holds 62.05% and Indian promoter holds 24.84%.

Styrolution is the only one of the key players dedicated entirely to styrenics, and a strong leader in the market.

It holds global number one positions in styrene monomers (SM), polystyrene (PS), styrene-butadiene block copolymers (SBC), other styrene-based copolymers (SAN, AMSAN, ASA, MABS) and copolymer blends, and a number two position in acrylonitrile butadiene styrene (ABS). Styrolution is the leading global styrenics supplier with a focus on styrene monomers, polystyrene, copolymers, and ABS.

As a joint venture of BASF and INEOS, Styrolution combines the key styrenics assets of two of the biggest chemical companies in the world.

The company provides styrenics applications for many everyday products across a broad range of industries, including automotive, electrical/electronics, building and construction, household appliances, toys/sports/leisure, packaging, health care and diagnostics.

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The promoters made an open offer on 20th Oct’11 as per Old

Takeover Regulation. However, the promoters also had the option

to pay Rs 120 per share less – as per new takeover code if they

had made the offer after 22nd Oct 2011 (as per our understanding)

We think promoters chose the old takeover regulation to avail the

option of delisting when their holding would cross the minimum level

of public shareholding after open offer

In contrast, new takeover regulation do not give the option to delist it

shows clear intention of the promoter to delist

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(Link)

On one side Styrolution wants to delist its shares.

On other side another promoter of Styrolution (BASF) wants to dispose of its stake.

If delisting not made so there is another chance of open offer when BASF sell its stake to other party other than Ineos.

Also Ineos is mandated to make open offer for Styrolution shareholder if they acquire shares through inter-se transfer promoter from BASF within 3 Years from the date on which they entered into contract with BASF.

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(Link)

Promoters need only 20% of Retail shareholders to tender

No single retail shareholder holds more than 1% of total holding

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Smart Investors No. Shareholders %

FIIs 7 0.66%DIIs 10 1%

Body's Corporate 287 2.07%Individual (>1 lakh share capital) 11 1.13%

Total 315 4.86%

Promoter holding 87.33%Delisting requirement 6.34%

1.48%(6.34%-4.86%)

Retail Holding(Ex smart investors & NRIs/CM)

20%(1.48% / 7.49%)

Retails Share tender required

7.49%

%age Retail tender required

MNC expanding – Increasing capacities by >30%

◦ Company has already made capacity expansion from

60,000 TPA to 80,000 TPA in 2011

◦ Plans to further augment the capacity to 110,000 TPA by

the end of CY2012.

◦ Capacity expansion for Styrene-Acrylonitrile (SAN) from the

existing 60,000 TPA to 100,000 TPA too is in process.

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Styrolution is expected to post revenue CAGR of 15% in next three

years, given its expansion plans

The company is backed by a strong and well funded MNC

Promoter has shown intent to delist and other promoter subsidiaries

are also private, which makes a strong case for delisting

MNC, delisting candidate, available at 21x FY11 EPS and 14x

EV/EBITDA

Stock can steadily compound even if the delisting doesn’t go through

Note:- No disclosure in annual report regarding provision of contingency which was 9% of net profit of FY 2011.

Sah Petroleum ltd is one of the leading manufacturers of industrial lubricants in India. The company manufactures wide range of industrial and automotive lubricants, specialties and process oils under the brand name of IPOL.

Navis Capital Partners holds majority stake around 62% , while Indian promoters hold around 25 %.

Navis acquired stake through preferential allotment at 27 Rs and then through open offer at 48Rs.

Price around Rs 27, mcap ~ Rs 120 cr, Cash ~ Rs30 cr. and investments in short term MF ~ Rs 45 crores and negligible debt. EV ~Rs 45 cr. against EBITDA of ~Rs 30.80 cr. and sales ~Rs 550 cr.

Concern – Bottom line fluctuates a lot due to currency movements.

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1st There may be chance of delisting because if the same thing which was bought in 2008 at Rs. 48 is available 40% discount from that.

2nd Navis Capital would seek exit because generally fund is not invested in any company for perpetuity.

Risk –Indian Promoter it seems could avoid delisting by converting its classification to Non promoter like in case of Evreronn.

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The management looks at Wheelabrator as a big growth driver. Margins in Wheelabrator products are as high as 30%+.

In the quarter sep-2012 the promoter holding’s in this company is 86.49. Could be a delisting candidate in the coming years.

The Share currently traded at PE multiple of 18.66 and P/B is 5.11.

Disa India is very well covered by Mr. Neeraj Marathe in his Blog

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Abbott Ltd:- Extracts from annual report of Abbott ltd.

Abbott limited holds 74.99% in Abbott India ltd.

Link: http://media.corporate-ir.net/media_files/irol/94/94004/Proxy_Page/AR2011.pdf

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BASF Group:

Extracts from annual report of BASF Inc.

BASF group holds 73.99% in BASF India limited.

Link: http://www.basf.com/group/corporate/en/function/conversions:/publish/content/about-basf/facts-reports/reports/2011/BASF_Report_2011.pdf

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Kokuyo Co. limited

Extracts from annual report of Kokuyo co. ltd.

Kokuyo Co. Ltd. holds 63.97% in Kokuyo Camlin limited.

Link: http://v4.eir-parts.net/DocumentTemp/20121022_092652697_sb0t2rjp3eoqkhzsexv4yyux_0.pdf

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Clariant Chemical Limited :-

Extracts from annual report of Clariant Chemical limited.

Clariant chemical limited holds 63.4% in Clariant chemical (India)limited.

Link: http://clariant.com/C12575E4001FB2B8/vwLookupDownloads/AnnualReport_Clariant_2011.pdf/$FILE/AnnualReport_Clariant_2011.pdf

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Its always better to take a basket bet to reduce risk and dependency from performance of Individual candidate.

For a matter of practice we usually invest after getting the postal ballot approval from shareholders and sell before opening of reverse book biding process to avoid event risk.

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You can reach me on :

[email protected] +91-9999751327

Perfect ResearchT-24A Green Park Extn.New Delhi – 16Blog: http://perfectresearch.blogspot.inTwitter: @ashishkila

Please feel free to contact me with any suggestions & ideas regarding delisting.

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delisting - an unfair binary game

Economy & Finance

offer shareholding

year acquirer

delisting deadline

link link

acquirer holdstender

shareholding to75

public holding

open offer