Delisting bets

Delisting fever has hit the market in the last few weeks/months with 1 major delisting of Atlas Copco gone thru successfully (and I might add at an astonishing price, way beyond what was generally expected and at very high valuations).  

Just today, Alfa Laval has declared that it has finalized an offer price of 4000 per share for buying out its minority shareholders. Alfa Laval scrip has recently been hovering consistently higher than the 3000 mark from about 1700 in April ’11 when this news first started doing the rounds. It would be an extremely expensive acquisition for the parent who surely wouldn’t have bargained for shelling out such a huge amount, not to mention exorbitant valuations (@4000 Alfa Laval quotes a P/E of about 55.6 on a ttm basis with the performance nowhere near  justifying this valuation; even for MNCs this is a tad expensive). Last time they made an open offer in 2009 @1000 and could get only about 12% shares. So in effect, it has moved up 4 times in the last 3 years!

Over the last few weeks, the exit prices that were talked of ranged from 2400 to 3200 with 3850-4000 range being the latest just before the formal announcement of this price. It has followed in the footsteps of Atlas Copco where too the exit price astonished, with valuations not being a parameter at all (a P/E of 35).

Just goes on to show that if the promoters are desperate enough, they will not stop at anything to buy out the remaining shareholders.

Coming to the present, the next hot list looks to be Blue Dart, Timken, Thomas Cook, BOC India and probably Elantas Beck (not necessarily in this order).

Blue Dart is presently quoting at 1975, and the talk is of a price anywhere from 1800 to 2100 and more. Considering that it is already at 1900+, 2100 looks quite low. It may well go past 2100, as happened with Atlas Copco and today with Alfa Laval. Going by the record over the last few months, people would surely have realized the true worth of their shares and wouldn’t want to let go so easily. Now even 2800-3000 doesn’t look impossible for Blue Dart (if the valuation of Alfa Laval is anything to go by; it has already crossed the valuation offered by Atlas Copco;). It will purely be a function of the promoter’s desperation. So there is still scope for an upmove in excess of 40% at least.

Parent Timken holds 80% in Timken India, so they need another 10% for delisting. Some time back, there was talk of Timken delisting around 300-320. If this is to be believed, there is still lot of room left with Timken currently @240. Again if we go by the previous 2 delistings (though they were poles apart in terms of valuations with Atlas Copco being more reasonable though not necessarily cheap), it could go anywhere between 350-550.

In Thomas Cook, parent holds 77% and has initiated moves to sell the Indian unit to clear its own debts. Last heard they had appointed merchant bankers for the valuation and had invited bids from suitors. But it has already run up by about 50 % from the recent lows of around 40 and further upside would depend upon the interest shown by buyers and the valuation sought by the parent. The previous 2 delistings give a range of 90-145 with an upside of at least 50% from current levels. However, the parent hasn’t categorically stated that they will sell unless they get a good price. And Thomas Cook as a brand has a very strong brand equity in the travel & tourism market. So this delisting may not really happen if parent thinks it is not really getting a good price for this and may wait for better times before again entertaining sell-off thoughts.

BOC India, which is in the industrial gas business, had earlier unveiled an offer to acquire 10.52% of the paid-up capital, or 89.75-lakh equity shares. The company had set Rs 225 as a floor price to buy out local shareholders. As per reports, BOC was unable to acquire a minimum of 44.88 lakh shares from the public, with just 39.3 lakh shares tendered. 15.85 lakh shares were tendered at Rs 600 per share, thus making the discovered price @600. Interestingly, the price since then hovered around 300, before spurting to 480 in recent times, thus the expectation clearly is for a lot more. Again if we go by the previous 2 delistings (though they were poles apart in terms of valuations with Atlas Copco being more reasonable though not necessarily cheap), it could go anywhere between 500-800.

Elantas Beck looks a fit candidate for delisting. Parent (currently holding 88.55%) requires crossing 90% holding and acquiring minimum 50% of balance shares, which amounts to 454,000 shares, to delist, which is not too high. Currently quoting at 1860, market expectation is > 2000. Going by recent trends, even this looks conservative. At this price, it has already crossed the valuation of Alfa Laval.

None of these stocks are cheap on pure valuation parameters. But then there are some considerations which merit some thought here:

1. They have a very good pedigree with parents who are leaders in their sectors.  So even if u buy and hold, chances of going wrong are low. When the economy recovers, there will be enough upside still left esp. if parent starts showing more interest as in the case of Alfa Laval over the last few years.
2. They are MNCs who traditionally enjoy premium valuations compared to the industry average or Indian counterparts.
3. Only a minor share (<= 20%) is with the public, so buying them out may not be a very difficult proposition for the foreign parent, even at a good premium to the current market price.
4. The parents would need to reduce their stake to 75% max by June 2013, so there is still enough time to wait for a suitable opportunity to get a good price for the promoters as compared to a bull run where the valuations would anyway be stretched. And looking at the past 6m-1 year, now would be as good a time as any to go for it and get a relatively lower price than in good times, though this theory has been shaken a bit in recent weeks, once the news is out.

Please note that I have made a frequent reference to the last 2 delistings which happened in the last 2 months. It is not necessary that the parents of the companies discussed above would be willing or even consider offering that kind of valuation. BOC and Goodyear are a case in point. Both of them found the discovered price too high to accept for delisting and abandoned the offer. However, all of the above companies are of a good pedigree and can be considered for the long term, preferably at much lower prices, especially when markets crash, as had happened in December last, when these were quoting about 20% lower.