open offers

Ashish Kila

Perfect Research

The gross profits appear quite small individually in a special situation, but in aggregate

Our Chairman - Mr. R.A. Kila

Perfect Research Team

““Workouts” – these are the securities with a timetable. They arise from corporate activity – sell-outs, mergers, reorganizations, spin-offs, etc. In this category we are not talking about rumors or “inside information” pertaining to such developments, but to publicly announced activities of this sort. We wait until we can read it in the paper.”

The gross profits in many workouts appear quite small. It’s a little like looking for parking meters with some time left on them. However, the predictability coupled with a short holding period produces quite decent average annual rates of return after allowance for the occasional substantial loss.

--Warren Buffett

In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance. In the narrow sense, you do not have a real “special situation” unless the particular development is already under way.

-- Benjamin Graham

“Something out of the ordinary course of business is taking place that creates an investment opportunity. The list of corporate events that can result in big profits for you runs the gamut — spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions.”

-- Joel Greenblatt

De-listing.

De-merger.

Mergers and Acquisitions.

Tender Offers.

Bankruptcy Proceedings.

Spinoff.

Huge investments possible normally due to good liquidity. Well defined timelines. Very low failure rate vis-à-vis delisting etc. Risk of withdrawal by promoter absent. Calculated risk is fairly low as compared to others. Decent number of such opportunities available throughout the year.

Lastly, we can use this corporate event as an opportunity to create cheap shares…

Open Offer

DelistingDe-merger

Open Offer :- Introduction

Checklist of Open Offer.

Using Open Offer to create cheap shares Examples from our Investment History:-

1.Orient Refractories. 2.Shanthi Gears.

3.Liberty Phosphate.

Highly Liquid Vs Illiquid Open Offers Examples:- HUL , Crisil and Gujarat Auto.

7

An open offer is an offer from either the promoters or a big investor to buy shares from the open market at a fixed price.

Most open offers come at a premium to market price.

Offers could be voluntary or compulsory.

Friendly Takeover.

For Raising Stake.

Hostile Takeover.

OPEN OFFER REQUIREMENT:

SEBI Takeover Regulations 2011 - Shareholding Thresholds:-

Source:Financial Express,Business Standard

-For special situation opportunities we go through BSE website’s corporate announcement section.

-Also most of these announcements come in Financial Express Newspaper.

Whole process takes approx 3 months . Delay could happen at SEBI level for giving its comments on DLOF and subsequently seeking questionnaire from merchant banker.

Public Announcement

There are some risks involved into open offer cases:

1.Deal Risk: There are always some risk from regulatory side that the deal may not get through eventually. Acquirer's profile also plays an important role in shaping the final outcome of the deal.

2.Time Risk: Clearance from various regulators (SEBI, RBI,CCI,FIPB etc.) is required for the deal to get through. It may take some considerable time in getting the final approval especially in the case where the acquiring promoter does not have a clean track of public market activities and there are some controversial clauses embedded into the deal agreement.

Note: Interest on delay: If there is delay from acquirer side to reply SEBI queries, then the interest @10% is paid to the shareholder for delayed period(As in case of Wintac)

Exceptional Case…??

SEBI Se Panga..!!

In October,2011Marg Ltd made an voluntary open offer to acquire the 20% fully diluted voting capital at Rs.91 per share.

Due to previous takeover violation by promoter SEBI asked the promoter to revise the offer price to Rs.216 per share .

Promoters of Marg ltd. moves to SAT against SEBI order and pray for withdraw of open offer because of delayed reply from SEBI site.

SAT allowed to withdraw open offer .

Now SEBI moved to Supreme court against SAT Order.

Link Link

Acquirer background and financial strength would have raised flags for the Marg case

Also an additional check could be that unless an open offer given by existing promoters is by large Indian/MNC corporate, we should prefer

a) Change of Control Transaction Because existing promoters are price sensitive (like Marg) as they

already have control over the company whereas any new acquirer will only get control after the deal goes through. So new acquirer will pursue the deal more vigorously

Keeping Tab of Timelines

-For tracking open offer detail,we go through SEBI website.

Keeping Tab of Approvals

For checking the status of approval, we go through FIPB website.

For checking the status of approval, we go through CCI website.

An open offer for acquiring shares once made shall not be withdrawn except under any of the following circumstances—

A. Statutory approvals disclosed in the detailed public statement having been finally refused.

B. The acquirer, being a natural person, has died.

C. Any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer.

D. Such circumstances as in the opinion of the Board(SEBI), merit withdrawal.

In July,2005 Nirma Industries ltd. made a mandatory Open offer for acquisition of Shares Shreerama multitech ltd.

After announcement acquirer found some discrepancies in financial accounts of shreerama multitech on the basis of that Nirma filled withdrawal application to SEBI focusing Regulation 27 (1) d of the Takeover Code which allowed the withdrawal of the offer under ” such circumstances as in the opinion of the Board merit withdrawal”.

SEBI Disallowed the Same.

After that Nirma Moves to SAT against SEBI order and In June,2008 SAT also Dismissed the same

After that Nirma Moves to Supreme Court against SEBI order and In May,2013 Supreme Court also Dismissed the same and Pass an order to instruct the Nirma Industries ltd to proceed with Open offer and follow regulation.

Voluntary open offer is a statement of the confidence promoter have in the future potential of the company and the value it is likely to bring to the table.

if investors give in their shares, on the one hand they earn a reasonable premium over the existing stock prices, but on the other hand, they also lose out on future earnings if the company does well. And if you decide not to surrender your shares, the reverse holds true.

Decision on selling or holding on to your shares should be based on a methodical assessment of the post-takeover scenario.

Decision should be based on the assessment of the future prospects of the acquired entity. "Assuming that the open offer is coming from a strong acquirer who has solid plans for the company, investors could hold on. At most times, such acquirers add value to the company."

M. Sundararajan, VP & Group Head (M&A and Advisory), SBI Capital Markets

Investors should look at open offers in the same way they would look at any other stock from the sell or hold angle. "If an investor sees long-term potential in a company, then he should hold on, or else surrender.

Rakesh Jhunjhunwala

Source: Business Today

We see every “Open Offer” from two perspectives:

(1) Value investing Perspective

(2) Short Term Perspective- Arbitrage

Share sale in an open offer is like any other equity transaction but since there is no securities transaction tax (STT) on it, the concessional tax rate of Short Term & Long Term Capital gains is not available

Tax Regulations for Open Offer Transaction-

Long Term Capital Gains-This transaction is not exempted from long-term capital gains tax. Hence, the gains are taxed at 10% without indexation or 20% with indexation, whichever is lower.

Short Term Capital Gains- The capital gains will be added to investor’s income and taxed according to the tax bracket he falls under.

Source:www.Business Standard



Open offer: Value opportunities with corporate actions as triggered Examples from our Investment History:-

1.Orient Refractories1.Orient Refractories

2.Shanthi Gears 3.Liberty Phosphate.


.

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The Company provides a wide range of special refractories and monolithics to meet the needs of the iron and steel industry.

ORL customers include large domestic integrated steel producers and mini steel plants that includes Steel Authority of India, Mukund Steel, Tata Iron and Steel Company, RINL – Vizag, Sunflag Iron, Lloyd Steel, Usha Martin and the Jindal Group.

RHI, which is one of the largest refractory companies in the world acquired around 43.6% shares from the promoters and made a public offer of around 26% as per SEBI guidelines

The agreement was entered at Rs 43 per share and the public offer for 26% was also made at the same price.

Source:Orientrefractories.com

Refractories are non-metallic heat resistance materials that constitutes the lining for high-temperature furnaces and reactors and other processing units.

Refractory products fall into two categories:brick or fired shape and specialities or monolithic refractories.

Brick or fired shaped refractories:

Monolithic refractory is the name generally given to all unshaped refractory products. It comes in various types: Castables, Plastic,Ramming,Patching,Coating, Refractory mortars, Insulating castables:

Source:CERAM Research Ltd.

Source:rhi-ag.com

The Indian Refractory industry is estimated to grow at 10-12 per cent annually. The refractory industry is fragmented with more than 150 players, of which,15 to 16 are major players. Production Capacity of refractories in India is estimated with 2.5 million tons(MT). The top four manufacturers account for more than 50% of the total production volume. India contributes to 4.5% of the world production of refractory materials.

Raw material source Value added Refractories Premium steel/lower

specific cos.

Raw material

Raw material

Refractory manufacturer

Refractory manufacturer

Steel/ other industries

Steel/ other industries

Source:researchmarket.com,Business line

Source:status and outlook of indian refractory

industry,B.V.Raja,IRMA

Particular 201303 201203 201103 201003 200903 200803Revenue 361 300 267 218 210 170Revenue growth(YoY) 20.33% 12.36% 22.48% 3.81% 23.53% 19.72%EBIT 65 50 46 47 44 26EBITM 17.89% 16.57% 17.24% 21.37% 20.98% 15.04%Capital Employed 105 77 99 78 77 70ROCE* 61.74% 64.58% 46.36% 59.84% 57.57% 36.56%

*Segment asset given in balance sheet is used as a proxy to capital employed.Source:Orientabrasives.com,bseindia.com

Based on FY'13 annual results. *-Based on standalone nos.as on 16-jan-13,moneycontrol.com

Peer Group Comparison(Standalone):Peer Group Comparison(Standalone):

Orient Refractories Vesuvius India IFGL RefractoriesYear End 201303 201212 201303Net Sales 361 564 307PATM(%) 11.48% 9.89% 5.56%ROCE(%) 61.74% 23.12% 14.63%ROE(%) 40.43% 16.24% 12.46%P/E(x)* 11.19 12.69 7.96P/B(x)* 6.01 2.06 1.08

Source:Ace Equity Database

>Refractories:73% of total revenue for year ended march 2012 came from it's refractory business.

Particular 201203 201103 201003 200903 200803

Installed Capacity(M.T) N/A 16000.00 16000.00 16000.00 16000.00

Capacity Utilized(CU)(%) N/A 98.94 76.96 71.65 75.52

CU Growth rate(YoY)(%) N/A 28.56% 7.41% -5.12% -28.41%

>Monolithics:

Particular 201203 201103 201003 200903 200803

Installed Capacity(M.T) N/A 28000.00 28000.00 28000.00 28000.00

Capacity Utilized(CU)(%) N/A 61.91 65.76 97.05 76.96

CU Growth rate(YoY)(%) N/A -5.85% -32.24% 26.10% -28.94%

*Segment asset given in balance sheet is used as a proxy to capital employed

15.0420.98

21.37

17.24 16.5717.89

36.56

57.5759.84

46.36

64.5861.74

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012 2013

EBITM

ROCE

Based On FY13'03 financial results

40.43%

16.24%12.46%

61.74%

23.12%

14.63%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Orient Refractories Vesuvius India IFGL Refractories

ROE

ROCE

Orient Refractories:-Orient Refractories:- Acquired by $1.29 billion German Major RHI Group, globally operating supplier of high grade refractory products,systems and services. RHI Group Revenue by segment and region(2012):

Vesuvius India: Vesuvius India is a part of $1.38 billion Vesuvius Plc,a UK based group engaged in metal flow

engineering,developing,manufacturing and marketing ceramic consumable products and systems to the global steel and foundry industries.

Vesuvius Plc revenue by segment and region(2010):

Source:Rhi-ag.com,reuters.com

The RHI Group sets ambitious goals for 2020: Revenues of EUR 3 billion and an EBIT margin of ≥12%!

In the year 2012, RHI generated 56% of its revenues in the emerging markets.

In the year 2020, this share may amount to 70%. Southeast Asia and especially India are currently among the most

attractive markets for refractory products. India is one of the fastest growing markets for refractory products. RHI Refractories had been the largest importer of refractories in India

before 2007. RHI, has picked up 51% stake in Clasil Refractories,India in Feb 2007 RHI closes acquisition of 43.6% stake in Orient Refractories Ltd. India in

March 2013.

Source:RHI annual report,Economic times

ORL is a strategic fit as it strengthens market position in a high growth market (difficult to access from outside) and has a proven track record of very profitable growth (high margin products; low cost manufacturing).

RHI: sales 2007-12: 47 => € 102 million (CAGR: >16%); average EBIT margin~8.5% ORL: sales 2007-12: 19 => € 44 million (CAGR: >18%); average EBIT margin >15%

Strategy for ORL -More than double ORL’s business until 2020 -Push ORL products outside India through RHI’s sales network (esp. Asia, Middle East) -ORL will stay a listed company and keep the brand name and the business model in

India. -ORL gets access to RHI R&D know-how as well as group purchasing conditions.

.

Source: RHI's analyst day data presentation,Porsgrunn

The RHI Group has pursued a clearly defined strategy for many years, which is based on expanding market presence in the emerging markets, increasing self-supply with magnesia raw materials and an optimized cost structure.

Continuous solutions which constantly increases the competitive advantage: that’s what distinguishes RHI and makes it unique.

The RHI Group set ambitious goals for 2020: Revenues of EUR 3 billion and an EBIT margin of ≥12%.

Particular 201212 (in Euro mill.)Revenue 1835.7EBITM 9.13%PATM 6.18%ROCE 13.74%ROE 23.62%

Source:Annual Report 2012

India has emerged as the fourth largest steel producing nation in the world, as per the figures release by World Steel Association in April 2011.

The Indian steel industry accounted for around 5% of the world’s total production in 2010.

Further, if the proposed expansion plans are implemented as per schedule, India may become the second largest crude steel producer in the world by 2015-16.

The demand for steel in the country is currently growing at the rate of over 8% and it is expected that the demand would grow over by 10% in the next five years.

Source:www.indiasteelexpo.in

Source:RHI-AG

Acquirer's Name Shares to be acquired( Offer Size) 31236192 26% Old Promoters group holding 58399665 48.6% Stake acquired from old promoter 52380691 43.6% Old Promoter holding after open offer 6018974 5.0% Acquirer's Stake AFTER Open Offer 83616883 69.6%

RHI Group

Current Market Price 37.5Offer Price 43Profit Expectation 5.5 14.67%Cost Of Execution 0.25%Return Expectation 14.42%

Source:BSE India

Retail Shareholders:- As seen in Open Offer that all retail shareholders are generally not aware/take effort to tender shares in open offer because of documentation process.

Shareholders holding Shares in Physical Form don’t even track stocks regularly.

Institutional Holders who see long term value in target company.

Examples:-Glaxosmith Consumer ,HUL ,Crisil Ltd.

With 70% acceptance ratio , the price for the residual shares drops to Rs 25 against the market price of Rs.39 before open offer. In other words, we can create shares in Orient Refractories at a substantial discount to current price.

Orient Refractories has become the Indian subsidiary of the world’s largest refractory player ( RHI AG). At adjusted price of Rs 25, stock will be available at PE of 7.46x, PB of 4x and Dividend Yield of 4%.

Considering the backing of RHI group (the largest refractory manufacturer in the world), will give Orient Refractories access to larger international markets and attractive valuation.

Source:nseindia.com,prices are taken on closing basis.



Using Open Offer to create cheap shares Examples from our Investment History:- 1.Orient Refractories

2.Shanthi Gears 3.Liberty Phosphate


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Shanthi Gears Ltd (SGL) was established in 1972.

It’s product portfolio encompasses a range of customized gear boxes, loose gears, worm gear boxes and helical gear boxes.

Tube Investment (TI) acquired the promoter’s stake (i.e. 44.12%) of SGL for INR 2.92 billion i.e. INR 81/share.

As a result of the above transaction, mandatory open offer to acquire another 26% got triggered.

New promoters(TI) announced open offer to acquire 26% on 20th July.

Acquirer's NameNo. Percentage

Shares to be acquired(Offer size) 21246122 26.00%Acquirer's stake before open offer 36050291 44.12%Acquirer's stake after open offer 57296413 70.12%

Tube Investment of India Ltd.(Murugappa Group)

Particulars No.of Shares %Holdings No.of Shares %Holdings

Tube Investment Ltd. 0 0.00% 36059741 44.13%Preferential Allotment 0 0.00%Conversion of GDR 0 0.00%Total of the above 0 0.00% 36,059,741 44.13%parties to agreementPromoter holding 36,050,291 44.12% 0 0.00%Individuals 28,950,291 35.43% 0 0.00%Trust 7,100,000 8.69% 0 0.00%Public Shareholding 45,665,562 55.88% 45,656,112 55.87%Non Promoter Corporate 3,890,064 4.76% 9582147 11.73%Retail Public below 1 lac 22,397,005 27.41% 17561364 21.49%Retail public above 1 lac 1,739,613 2.13% 1541486 1.89%Total Institutions 15,345,723 18.78% 15126209 18.51%Non-Resident Indians 1,222,141 1.50% 831484 1.02%Overseas Corporate Bodies 3,053 0.00% 3,053 0.00%Clearing Member 216,545 0.26% 347141 0.42%Trust 3,000 0.00% 3,000 0.00% Director Relatives & Friend 117,328 0.1% 5000 0.0%HUF 731,090 0.9% 655228 0.8%Grand total 81,715,853 100.0% 81,715,853 100%

June End September End

Assume Tender from various categories of Shareholders:-Best Probable Worst Actual Theoretical

Non Promoter Corporate 70% 80% 90% 80% 100%Retail public 30% 45% 50% 40% 100%Total institutions 80% 80% 85% 84% 100%Total foreign 75% 80% 95% 83% 100%

Shares Likely to be tendered 25,165,228 29,030,597 31,825,445 28,705,539 44,645,743

Total Offer 21,246,122 21,246,122 21,246,122 21,246,122 21,246,122Surplus /Deficit 3,919,106 7,784,475 10,579,323 7,459,417 23,399,621% of shares getting accepted 84% 73% 67% 74% 48%% of shares getting rejected 16% 27% 33% 26% 52%

Purchase 68 68 68 68 68Open offer Exit Price 81 81 81 81 81Value of Remaining Shares 0 32.5 42 31 56

TI is in the industrial chain business, which caters to power transmission business. Gearbox also forms a part of industrial power transmission. So acquirer wanted to move up the value chain from the current crop of chains into more specialized chains and related systems.

TI expected to improve its overall margins as Shanthi Gears operating profit margin stood at 39 per cent in FY12 compared to Tube’s 10.5 per cent.

TI expected to increase capacity utilization to 90% in next 3 years from current 35-40 per cent as Shanthi Gears went slow on low-margin orders. This is probably why the acquisition price looks a bit high.

Source:Livemint.com,tiindia.com-investor meet

Our actual cost was Rs 31 per share( against offer price of Rs 81) so we have invested with long term perspective. Now the Share are traded at Rs.55-60 in market.

Shanthi Gears EBITDA & PAT margin are 22.81% and 15.01% respectively, however ROE is low( ~ 11.79%) but that is because of low asset turnover(Capacity Utilization). Capacity utilization for company was ~ 30% at time of open offer.

As acquirer is determined to bring capacity utilization from 30% to 90%, asset turnover is expected to improve that will ultimately increase ROE & margin.

Investment Thesis: Value Investor PerspectiveInvestment Thesis: Value Investor Perspective

Note:- Remaining Market Share Exit Price is taken on the basis of market price of Share before the open offer announcement.

Market price of the Share few months before the open offer announcement.

Fundamentals of Companies on the basis of PE, PB, DCF, Dividend Yield etc.

Possibilities of synergies being generated by Acquirer in target company.

In our calculation for exit price of remaining shares of Shanthi Gears Ltd. after closure of Open offer is estimated on the basis of following parameter mentioned below:-

Conservatively took Rs. 48 as exit price in previous slide.

Company came up with an open offer on 13th July, 2012. We entered one week after the announcement @ price of Rs 68 .

Open offer ended on November 2012. Hence, in just 5 months we earned 9% return on our capital. (Annualized Return~21.6%)



Using Open Offer to create cheap shares Examples from our Investment History:- 1.Orient Refractories. 2.Shanthi Gears.

3.Liberty Phosphate


74

Liberty Phosphate Ltd. took birth in 1976 and carried out expansion time to time to enhance its capacity to cope up with the increasing demand. Now the group is having manufacturing capacity of 7,25,000 MTs. per annum of SSP fertilizer and 1,65,000 MT per annum of NPK, claiming to be one of the major SSP manufacturing company in the country known as 'LIBERTY PHOSPHATE LIMITED‘.

At present, the company is having 14.25% market share of the total consumption of SSP in the country. The group is engaged mainly in the production & sales of SSP and also supplies 100% water soluble to the farmers of Gujarat, Madhya Pradesh and Maharashtra. The group is importing the same from well reputed manufacturer SQM from Belgium in loose form and packaging in India in very popular 'Double Horse' brand before supplying.

Coromandel International Limited :-

One of the largest companies within the Murugappa Group, Coromandel International, has been vitalizing the agricultural sector since its inception in 1964 under the name Coromandel Fertilizers. Today, Coromandel International is a leading manufacturer and markets a wide range of Fertilizers, Speciality Nutrients, Crop Protection and Retail.

Coromandel International acquired Liberty Phosphate Ltd. Promoter’s stake of 62% at Rs. 241 per share and made the mandatory open offer for 26% at same price.

Acceptance Ratio & Profit Calculation Analysis:Acceptance Ratio & Profit Calculation Analysis:

Assume Tender from various categories of Shareholders:-Best Probable Worst Theoretical Actual


Shares Likely to be Tendered 3,130,318 3,649,535 4,522,810 5,569,966 4,728,361

Total Offer 3,753,932 3,753,932 3,753,932 3,753,932 3,753,932Surplus /Deficit -623,614 -104,397 768,878 1,816,034 974,429% of shares getting accepted 120% 103% 74% 67% 79%% of shares getting rejected -20% -3% 26% 33% 21%

Purchase 215 215 215 215 215Open offer Exit Price 241 241 241 241 241Remaining Market Sell Exit Price 130 130 130 130 130Composite Exit Price 263.1 244.2 211.8 204.8 218.1Profit 48.1 29.2 -3.2 -10.2 3.1Profit % 22.4% 13.6% -1.5% -4.7% 1.5%

The Share was trading at Rs.210 after the announcement of open offer at Rs.241, the gap between prices was Rs.31(14.76%).

Assuming the acceptance ratio (worst case) @ 82%. The stock became attractive to purchase . We made an entry on that level and within 15 days stock reached Rs.227 per share and we exited after booking 8% profit.

Short Term Play in Open Offer:-Short Term Play in Open Offer:-

Source:- Google Finance

In our calculation for exit price of remaining shares of Liberty Phosphate after the closure of Open offer is estimated on the basis of following parameter mentioned below:-

On Conservative basis we took Rs. 130 as exit price in previous slide.

Unit ValueMarket price Rs. 210Last six month Wtd. Avg. Closing Price Rs. 159Last Three Month Wtd. Avg. Closing Price Rs. 17052 Week High Rs. 22452 Week Low Rs. 46DCF Value (Intrinsic value per share) Rs. 109

Average Rs. 153

Pricing parameters before Open offer announcement

As per our calculation the exit price was around Rs.130 but after the open offer closed, the Share price came down to Rs. 90.

Reasons for sharp fall in price :-

1. Arbitrageur Selling.

2. No Institutional/Mutual fund Support.

After the arbitrageur selling got over the share price bounce back to Rs. 130 Level.



Using Open Offer to create cheap shares Examples from our Investment History:- 1.Orient Refractories Ltd. 2.Shanthi Gears Ltd. 3.Liberty Phosphate Ltd.


82

Highly Liquid :- HUL, Crisil Ltd.

Illiquid :- Gujarat Auto Ltd.

At the time of HUL Open offer, the Share was highly traded and also available in Future Segment .

Just before the open offer closing date the Share was easily available at below open offer price. Stock was trading at Rs. 583 against open offer price of Rs.606 per Share.

One could easily earn the return of 3.9% in a month. But Investors failed to take the benefit because of their low acceptance ratio calculation but contrary to that all the shares were accepted in the open offer.

Acceptance Ratio & Value of Remaining Shares Acceptance Ratio & Value of Remaining Shares Analysis:- Analysis:-




Shares Likely to be offered 596,641,893 666,013,221 768,408,937 1,027,622,850 319,563,398

Total Offer 487,004,772 487,004,772 487,004,772 487,004,772 487,004,772Surplus /Deficit 109,637,121 179,008,449 281,404,165 540,618,078 -167,441,374% of shares getting accepted 82% 73% 63% 47% 152%% of shares getting rejected 18% 27% 37% 53% -52%

Purchase 583 583 583 583 583Open offer Exit Price 606 606 606 606 606Remaing Market Sell Exit Price 500 500 500 500 606Composite Exit Price 586.5 577.5 567.2 550.2 606.0Profit 3.5 -5.5 -15.8 -32.8 23.0Profit % 0.6% -0.9% -2.7% -5.6% 3.9%

1. Generally, Investors do not tender their shares in open offer if they have invested with long term perspective.

2. Investors took this bet( Deciding not to participate in open offer) seeing the parent bullish stance towards Indian FMCG sector, citing parent paid huge premium for acquiring Shares.

3. Big Investors gave the indication in media that they are not willing to tender their shares in open offer.

Like HUL, Crisil Ltd also belongs to a liquid category stock. AtLike HUL, Crisil Ltd also belongs to a liquid category stock. At the time of open offer the share was highly traded.

Just one month before Open offer Closing date the Share was trading at Rs.1120, however open offer price was Rs.1210 per Share.

One could easily earn the return of 8% in a month. But Investors failed to take the benefit because of their low acceptance ratio calculation but contrary to that all the Shares were accepted (100% acceptance ratio) in that open offer .

Acceptance Ratio & Value of Remaining Shares Analysis:- Acceptance Ratio & Value of Remaining Shares Analysis:-




Shares Likely to be offered 18,285,367 21,819,514 24,515,777 33,026,260 10,623,059

Total Offer 15,670,372 15,670,372 15,670,372 15,670,372 15,670,372Surplus /Deficit 2,614,995 6,149,142 8,845,405 17,355,888 -5,047,313% of shares getting accepted 86% 72% 64% 47% 148%% of shares getting rejected 14% 28% 36% 53% -48%

Purchase 1120 1120 1120 1120 1120Open offer Exit Price 1210 1210 1210 1210 1210Remaing Market Sell Exit Price 950 950 950 950 1210Composite Exit Price 1172.8 1136.7 1116.2 1073.4 1210.0Profit 52.8 16.7 -3.8 -46.6 90.0Profit % 4.7% 1.5% -0.3% -4.2% 8.0%

In Gujarat Auto Promoters Holding was 70.62% and acquirer acquired 55% from promoters and hence had to come up with an open offer for 26%.

On the point of acceptance ratio, it was near to 100% i.e. (70.62%+26%=96.62%).

Post the open offer announcement, Shares were available in the market around Rs.1030 per share against the open offer price of Rs.1137 per share.

So, there was an evident risk free arbitrage of approximately 10% available in the span of just 2.5 months.



Shares Likely to be offered 34,668 54,125 59,723 102,820 29,194

Total Offer 91,000 91,000 91,000 91,000 91,000Surplus /Deficit -56,332 -36,875 -31,277 11,820 -61,806% of shares getting accepted 262% 168% 152% 89% 312%% of shares getting rejected -162% -68% -52% 11% -212%

Purchase 1030 1030 1030 1030 1030Open offer Exit Price 1137 1137 1137 1137 1137Remaing Market Sell Exit Price 1137 1137 1137 1137 1137Composite Exit Price 1137.0 1137.0 1137.0 1137.0 1137.0Profit 107.0 107.0 107.0 107.0 107.0Profit % 10.4% 10.4% 10.4% 10.4% 10.4%

If really there was a return of around 10% within just 2.5 month, then there is an obvious question to be asked.

Why arbitrageur did not take the benefit of the same..??

The only reason was…

“ Thinly Traded (illiquid) Share ’’

But the retail shareholders can take the benefit from these kind of situations.

Merely the presence of Mutual funds/Institutions is not enough. Because if they see the open offer as an “ exit opportunity ’’ then their presence will not help retail investors any way.

Example: Mahindra Forging Ltd

Critical points to look out for:

ShareholdingShareholding ( How significant is their investment? ) ( How significant is their investment? )

Their views Their views ( Invested for short term or long term? )( Invested for short term or long term? )

Shareholding- If Mutual Funds/Institutional investors have significant holding( like in HUL

30% and Crisil ltd. 26.5%) then they will play a significant role in deciding acceptance ratio for retail investors.

However, if their holding is insignificant then their presence will not affect retail investors.

Their Views- If the Mutual Funds/Institutional investors have long term view on target

company then they don’t participate in offer, which ultimately increases the “ acceptance ratios ’’.

Example: -HUL, Crisil ltd.

Even if they tender the shares in open offer they again buy post open offer at lower price, which gives price support to retail investors.

Example:- Shanthi Gears Ltd.

Hexaware is India's ninth largest IT exporter with annualized revenue of Rs 912 crore in FY12. The company is also sitting on cash and equivalents worth Rs 590 crore.

The Baring Asia Private Equity Fund acquired 41.47% stake in Hexaware Technologies Ltd. And hence had to come up with open offer of 26% in compliance with Regulation 3(1) and 4 of SEBI (SAST) Regulations

Company made announcement of open offer on 23-Aug-13. The open offer price was Rs.135 per share.

Baring Asia manages assets worth $5 billion — provides expansion, restructuring and acquisition capital to middle market companies.

In Hexaware Technologies Ltd. the acquirer after announcement of open offer started purchasing the Shares from the open market and acquired approx 8.76% of diluted equity capital.

When acquirer start buying shares from open market, it start changing the acceptance ratio every time.

Are they buying from open market route..??

Please feel free to contact me with any unanswered questions, suggestions & ideas.

[email protected] +91-9999751327

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

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