I had written about delisting
bets in March ’12 when the de-listing fever was at its peak with 1 major
de-listing 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). This frenzy continued with Alfa Laval,
incidentally another Swedish company, offering an astonishing Rs. 4000/share to
its shareholder for getting rid of them for good!
However this bubble did not last
beyond the next 2 months when Fresenius Kabi, a German pharma company
specializing in Oncology (cancer) drugs, announced in June ’12 that it is not
going ahead with delisting but would offer its shares for sale through stock
exchanges to increase the public holding in the company. This was a rude shock
to the hopefuls who had made bets on this very premise. And predictably, it had
a cascading effect with the few other hopefuls (AstraZeneca Pharma, BOC (India),
Honeywell Auto, Blue Dart Express and Elantas Beck) also tumbling in varying
proportions (2.5% to 9.4% in BOC India, showing the pecking order), though not
as much as 20% which FK did (it later recovered somewhat, but is still close to
its 52 week-low).
Having said all this, there does
appear to be a silver lining to this issue. The key thing to do would be to
focus on the factors which would lead to a company to go the delisting way,
other than the independence factor which it would bring to it. I have 2 such
factors in mind:
1. Business
imperatives – Consider the case of BOC (India). Going by comments made
by Sanjiv Lamba, BOC’s chairman and
member of the executive board of Linde, in May, de-listing could be a preferred
choice though he clarified that no firm decision had been taken as yet. The
decision could be taken close to June 2013 deadline set by the SEBI for
companies to bring down promoter holdings below 75%. Considering that it takes
anywhere from 3-6 months for an offer to complete, things should start moving
by Dec. ’12 if not earlier.
BOC plans to
on bidding for large businesses where PSUs are asking them to bid from (the
position of) a 100% owned entity. The option they have to get around this is to
bid as Linde Global, otherwise they won’t be technically qualified. Generally,
PSUs ask for 100% guarantee for 20 years from the parent company. How would
they get 100% guarantee from a parent for a company in which it owns 80%? As a separate entity, BOC, which is now trying
to diversify its client base beyond steel industry, would face challenges in
bidding for petrochemical sector as it would then have to source technologies
it has not used earlier, something that the oil PSUs won’t be comfortable with.
Obviously BOC India doesn’t have the breadth that Linde AG has in its product
offerings. So for BOC, de-listing looks to be a business imperative rather than
just getting its independence from Indian laws and shareholders as is the case with most others.
2. Large
institutional or single shareholding – As per SEBI rules, if the promoters of a
company want to de-list it, they have to buyout at least 50% of the minority
shares AND reduce the minority
shareholding to less than 10% (take the promoter shareholding to above 90%).
Consider the case of Fairfield Atlas which has been in the news for the last year or so
purely for this reason. Needless to say, it has also run up hugely (around
double) from levels then. This was not on my radar initially (as you can see
from the first list), but came to my notice recently when it started moving up
in huge spurts.
Here, the promoter shareholding is 83.91% and public
shareholding is 16.09%. Out of this, Reliance Capital Trustee Company holds 4.14%.
If the promoters want to delist the company, they have to buy at least 50% of
the public shares (approx 8.05% of the total shares). If they are able to buy
8.05% of the shares, 90% condition will be met too. If Reliance Capital is
convinced to sell its stake at an acceptable price to both parties, that will
leave only 3.91% (8.05-4.14) to be cobbled up from the public, from the
remaining 11.95%, which is only about 1/3rd. I would think this is more
than a fair chance of attaining, more so if it is at a good or even a
reasonable price (and it would be safe to assume that Reliance will not settle
for anything less than that). Being an institution, the price Reliance would expect
would be a function of fair valuation of the stock as well as its own acquisition
cost, which can be hugely different from what the public would expect. And @160,
@P/E of < 12 (on ttm earnings), it is quoting at less than fair valuation (purely
my thoughts – considering that other MNCs peers like WABCO @1500 quotes @P/E of
about 18, Bosch @8800 quotes @ P/E 23) even after last year’s run-up.
This makes a very good case for Fairfield
Atlas to be considered as a promising de-listing candidate which could succeed
in its efforts. Of course, the price is a factor which should be considered,
since as already mentioned, it has run up significantly. However, as has been
seen before in the Indian markets, once the news is out, sky is the limit and
stocks have doubled from already huge levels against all rationale (look at
Alfa Laval and Atlas Copco). This could play out the same way since the payout
may not be too huge for the promoters.
The story is playing out to the script. Fairfield Atlas (FA) has announced the approval of delisting process by its promoters TH Licensing Inc. And predictably, the scrip has hit the upper circuit. However, it may be wise not to get carried out by this euphoria as has been seen in the past.
ReplyDeleteThe process has just begun, not the delisting itself. And there is a long way to go before the actual thing happens. First there will be the announcement of a floor price, for what it is worth. The floor price neither indicates the company’s valuation of the share price nor has any binding on the final exit price discovered in the reverse book building process. In fact the hollowness of this concept can be gauged by the fact that the last few exits of Atlas Copco as well as Alfa Laval were many times of the indicated floor price by the respective companies. So I am not sure why this concept is still being adhered to by SEBI.
Coming back to the present, FA is on the UC @136.90 today. And chances of it coming off the circuit are pretty slim considering the low floating stock (for more details on the shareholding pattern, refer to my article http://dsshirvaikar.blogspot.in/2012/08/delisting-bets-still-holding-promise.html ). The keys to the delisting are obviously with Reliance Capital Trustee Company who holds about 25% of the floating stock. If the company/promoters succeed in persuading them to a mutually acceptable fair price, the delisting will go thru. One would do well to remember that the price was in the range of 180s in April ’12 when the delisting euphoria was at its peak.
From a valuation perspective, it is still going cheap @ttm P/E of less than 12 at CMP while its peers like WABCO (@1400, P/E of nearly 19) and Bosch (@9050, P/E of nearly 27) quote way above. If these valuations are anything to go by and the promoters desperation, as seen by the fact that when a lot of its peer MNCs are opting for OFS route they have still chosen to go ahead with the delisting, the stock could easily reach its peak levels of 180 or even exceed that. But for most retail investors, the opportunity looks long gone since it is unlikely to be available in the market any time soon.
Nearly 3 months later, the story is interestingly poised.
ReplyDeleteFairfield Atlas has touched a 52-wk high of 208 today. There is talk in the market that people have been getting phone calls with indicative price of Rs 225/-. Of course, as I have said in the above, the key to the whole matter is the price at which Reliance Capital is willing to sell. If they are convinced one way or the other at a decent price, the others would hardly matter.
Coming to the financials, Fairfield Atlas has posted an EPS of 10.48 for FY ’13. This means that @208, they are quoting at a PE of nearly 20. Its MNC peers such as WABCO @1650 quotes @24 and Bosche @9020 quotes @32. So even if u take a PE range of 25-30 for this (which is not really high considering that MNC companies do get a premium valuation, and with recent history that the Swedish companies Atlas Copco and Alfa Laval de-listed at PE in excess of 30), u still get a price of 250-300 which is nearly a 25-50% upside from the current levels. Again, depending upon the parent's desperation, a price of above 300 may also not be ruled out.
Of course the major risk for people betting on the above event unfolding is that the company may not accept the discovered price and call off the whole process (remember that the company has set an indicative floor price of almost Rs 136 in its delisting announcement to BSE on May 7). So those will be left with the stock they have bought in this hope. However, being a quality stock, the risk reward ratio is certainly promising.