ernst & young llp july 2017 - ey.com · variability in premium: there was a significant degree...

Control premium in India Ernst & Young LLP

July 2017

2 | Control premium in India

Executive summary Control premium: Concept

Control premium is the difference between the pro-rata controlling interest and the pro-rata non-controlling interest. It is therefore quantified as the excess of the price for a controlling stake in the target company being acquired over its publicly traded share price.

This study measures the control premium in India over a 15-year period during FY03—FY17.

Source: EY Analysis based on data from www.sebi.com

Control premium is the difference between the pro-rata controlling interest and the pro-rata non-controlling interest.

It is thus quantified as the excess of the price for a controlling stake in the target company being acquired over its publicly

traded share price.

Control value

Control premium

Minority interest discount

Marketable minority interest

value

Methodology Conclusions

• Open offers between FY03 and FY17 with an offer size exceeding INR 10 million were analyzed.

• Average of two-week and 26-week prices prior to the public announcement of the offer was considered as the “base price.”

• 373 transactions were identified, of which 303 transactions (81%) exhibited above nil control premium.

• Median control premiums of 31% based on 26W average price and 12% based on 2W average price were observed.

• The highest premium was observed in the consumer goods sector, while the lowest premium was observed in the engineering, procurement and construction (EPC) space.

• The quantum of control premiums was negatively correlated to the equity market movement.

• 26W premium was broadly in the range of a few global studies.

Control premium in India: MethodologyControl premium in India: Methodology• We analysed open offers between FY03 and FY17, each of which

had an offer size exceeding INR 10 million*.

• The companies with infrequent trading in shares for a period of one year prior to the announcement of the offer and companies where “consolidation of holdings” was the object of the offer were excluded.

• The average of two-week and 26-week prices prior to the public announcement of the offer was considered as the “base price.”

• Base price is a price that is “unaffected” by the transaction.

• For developed countries, typically a period ranging from one day to two-month average is considered.

• In India, where news/rumors of an impending transaction typically float around long before an official announcement, a longer period is suitable.

• Besides, SEBI regulations stipulate acquirers to look at a longer term average when buying out minority shareholding.

• 373 transactions were identified, of which 303 transactions (81%) exhibited above nil control premium.

*Source – www.sebi.gov.in

3Control premium in India |

Observations on control premium in India

• The average and median premiums for the period considered were 47% and 31% based on 26W average prices as the base and 24% and 12% based on 2W average prices as the base.

• Median premiums were considered more representative, as mean premiums were impacted by outliers (offer size weighted premiums were between the median and mean premiums).

• Premiums based on 26W average prices are higher than 2W average prices.

• It may confirm the view that information leakages are high in India, or

• 26W premiums may have been impacted by rising stock markets in India in the past 15 years.

Financial Year Number of transactions

Mean Premium Median Premium Offer Size Weighted Mean Premium

Base26W Base2W Base26W Base2W Base26W Base2W

2003 6 99% 52% 88% 48% 118% 67%

2004 11 71% 23% 52% 12% 28% 16%

2005 11 88% 23% 49% 6% 45% 10%

2006 25 43% 9% 37% 4% 43% 9%

2007 29 33% 16% 20% 11% 22% 6%

2008 38 36% 19% 26% 12% 37% 22%

2009 44 46% 37% 29% 20% 55% 37%

2010 30 64% 21% 37% 8% 48% 18%

2011 18 39% 8% 24% 9% 15% 22%

2012 19 56% 49% 22% 14% 60% 45%

2013 17 47% 37% 34% 16% 65% 60%

2014 8 44% 34% 37% 19% 44% 15%

2015 20 34% 17% 31% 10% 21% 11%

2016 11 24% 17% 24% 16% 11% -5%

2017 16 39% 15% 10% 4% 35% 12%

2003-17* 303 47% 24% 31% 12% 38% 22%


Source: EY Analysis based on data from www.sebi.com

Variability in premium: There was a significant degree of variability in the overall premiums as well as within each year.

Correlation with equity market levels: There was strong negative linear correlation between control premiums and movement in the equity markets (BSE Sensex movement being used as a proxy). Control premiums came down with rising markets and vice-versa.

Range of control premiums

% of

tra

nsac

tion

s ha

ving

cont

rol p

rem

ium

Control premium (%)

21%16%

12%14%

9% 7%

22%

0%

5%

10%

15%

20%

25%

< 10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% >60%

Median premiums (Base: 26W) and Sensex

Average Base2W

88%

52% 49%37%

20% 26%29%

37%

24% 22%34% 37% 31%

24%10%

0%

20%

40%

60%

80%

100%

- 5,000

10,000 15,000 20,000 25,000 30,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Prem

ium

(%)

BSE

Sens

ex


Source: EY analysis based on data from www.sebi.com

Source: EY analysis based on data from www.sebi.com

Sensex levels refer to the average Sensex level during the relevant FY.


Control premiums by industry

Control premiums by industry

Premium over 26W avg base (%)

Source: EY analysis based on data from www.sebi.comNote: Industries with five or fewer transactions were ignored.

Premium over 2W avg base (%)

31.4%25.5%

30.0%

84.9%

16.2%

28.5%33.8%

18.8% 19.3%23.8%

19.8%

32.4%

45.1%

35.4%41.6% 40.2%

5.3%

14.3% 15.8%

27.3%

4.9%8.7%

22.6%

7.5%

15.5%

4.2%

19.1%

12.7%

22.7%18.0%

6.1%

14.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Auto and autoancillaries

(13)

Cement andbuilding

products (10)

Chemicals and

fertilisers (21)

Consumer goods(10)

EPC (10) Industrials -Capital goods(25)

Informationtechnology

(34)

Infrastructure(6)

Media &Entertainment

(21)

Services (6) Textiles (23) Naturalresources

(23)

Pharmaceuticalsand

healthcare(24)

Hospitality and

Real estate (12)

Paper andpackaging

(7)

Financialservices

(42)

The highest premiums were observed in the consumer goods industry, while the lowest were in the EPC industry.


Control premium: Global examples

Mergerstat Review’s control premium: Over the past three years (up to March 2016), the quarterly median control premium in the US has ranged from 26% to 37%.

Ernst & Young Australia’s control premium study (2009):• Average control premium was 28% based on one-day prices and 48% based on one-month prices.• Median control premium was 26% based on one-day prices and 34% based on one-month prices.

Quarter-wise cntrol premiums in USA

3-Month Median Premium (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Cont

rol p

rem

ium

India’s 26-week premiums are within the range of these global examples.


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EYIN1707-073 ED None

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