Part 1
Imagine the date is today 02/11/2020 and read Part 1 as a case study.
The part mentioned Part 1 was published in November 2020.
Please consult us for detailed advice regarding the same. This is in no way an investment advice or buy/sell recommendation. It is just a sample of a situation which we may do. It involves its own risk (In terms of allocation or loss). We may change our mind before you may know (Or sell). So please if you want to do such situations, please consult us or any investment advisor.It can be used as a case study for future learning. We may be wrong and make mistakes. It is ongoing.
We own this position so please consider any conflict of interest
Company
Allcargo Logistics Ltd (ALL) is an integrated logistics service provider
and operates in multiple business segments – Multimodal
Transport operations , Container Freight stations/Inland
Container Depot, Project & Engineering operation , Contract
Logistics and Logistics Parks. Incorporated in 1993, as freight
forward agent , ALL forayed into multiple business by acquiring
multiple business over the years and recently acquired Gati Ltd.
ALL is amongst the leading player in the global LCL consolidation
market which contribute 80 percent of revenue.
Delisting Process
On 24 August 2020, the company has received the letter from the
promoter who expressed his intention to acquire all the fully paid
up equity shares of the company and voluntary delist the
company from both the stock exchanges.
Following to that , on 27 August,2020, the Board of members gave nod and appointed a
merchant banker for due diligence and 92.58/- per share was
decided as the floor price. The floor price is calculated in
accordance with the regulations and the shareholder have to
make a bid at a price either on or above the floor price.
In the delisting process , Promoters engage in reverse book building to
determine the price to be paid to public shareholder to make the
company private. For the promoter to announce the exit price
(final offer price) , his/her holding should reach 90%.
On 22 oct , the result of postal ballot have come out in which
shareholder also give their nod to the delisting of company shares.
Now the intimation is only pending from the stock exchanges.
After receiving the approval from the recognised stock exchanges ,
company should make public announcement including all the details and dates of reverse book building will be decided.
Past Odds?
Though our experience of such situations is low, our past study indicates such situations generally leave out room for profitable bets. Sometimes the odds are beyond 50%, this is as of now our thinking we may change and update as we learn more.
We can improve our odds of getting high exit price by assessing
the particular situations and also protecting our downside if the
delisting process get cancelled and we don’t get the opportunity to
tender the shares in between.
Risk
- Promoter Riks
The risk of getting involved in these types of delisting situations is of
rejection of the discovered price by the promoter( if he/her thinks of it
too high then there are high chances of rejection by the promoters example
Vedanta and Linda India in the past). In that case the arbitrager like us will rush to sell the shares which can bust the price in the markets and we may end up loosing in such situation.
2. Other shareholders not tendering
Not enough shares being getting tender . As per the law, The
condition is that the promoter needs to have 90% shares to declare the exit
price. If that additional shares ( excess of the promoter holding )
is not getting tendered and does not help the promoter to reach 90
percent then there would be no delisting and in that scenario
also share prices crashed by heavy selling by the arbitragers. (Example: Saint Gobain Sekruit India Delisting situation)
So we need to work wisely by taking timely exit other wise there are
high chances of loosing if we indulge in reverse book building
process ( However this decision is made on individual situations). From the date of
announcements of delisting to the date of announcements of the Reverse book building dates there is typically significant rise in the price of the stock due to many arbitragers
and even existing shareholder are taking position in the
speculation of high exit price.
Selling: We may sell before reverse book building or this is on case on case basis considering the marginal risk involve @ different price level and situation.
Upside Odds
Now thinking of upside, Can we improve the odds of delisting getting
successful as high exit price and that is being accepted by the
promoter?
- For that we need to know the Promoter intent why he
wants to delist the company.
Sometimes Promoters are ready to
pay very high discovered price for example , promoter is some
big foreign company and wants to delist its small off root in
India , Some big corporate house in India want to delist its small
wings etc , Some promoter due to corporate restructuring at the
parent level is by compulsion of law needs to delist are some of
the examples where we can judge from the intent of the
promoter to know at what level he/she can go to get the company
delisted.
In the case of All cargo Logistics, the rationale behind the promoter intent is
to streamline the process of servicing the group financing and
delisting in turn helps in accelerated the debt reduction program
and also align group capital’s and operational structure. Debt
reduction is one of major reasons behind the delisting. However, we are not
able to connect the dots that how delisting helps in reduction of
debts.
Yes in the business, debt remains the problem from the past
few quarters, But with help of deal which they recently have with Blackstone which will completed in period of 12 months ( One can
read about the deal in detail in the annual report of FY20), business
will be able to reduce major debt in the books.
If the intent is not so strong it seems to be not weak either. The involvement of Big group like
Blackstone in the company after the deal closed and Blackstone as
a group is big enough to Influence the promoters decision.
2. Promoter Corporate Savy
In the past , promoter himself done big acquisition in the past some in
foreign and some in India. Some acquisitions are five times bigger
than the company itself. Recently company have acquired the Gati
Ltd which is loose making unit at good valuations.
3. Valuation Perspective
Even if take the relative valuation perspective among the competitors ,
Allcargo commands the Low PE among the competitors. With
these, there are more chances that promoter will not hesitate to pay
up as valuations is not that bizarre. And if the PE would have on
the higher side then we can think there are very less chance of high
exit price from the current levels being accepted by the promoter.
Promoter has already have 70 percent of company shareholding.
These are some positives for the exit price discovered as high and
being accepted by the promoter.
Negative Case
The negative can be there are two major fund houses who hold good
portion of public shareholding which can influence the discovered
price ( as in the case of Linde India as share are tendered at very
high price which eventually becomes the discovered price) and
can end up rejection by the promoters. It is few people whose decision will influence the main decision.
Conclusion:- By weighting the pros and cons and considering loss
scenarios, you may take your own decision. However, we need to also consider the time such situations may take as they effect the return decisions. Another significant decision needs to be taken regarding how much needs to be allocated in the portfolio.
These are very important decisions and significantly determine the returns of the strategy.
Please consult us or your financial advisor before taking decisions in these kind of strategy.
Part 2 (As this was part of an ongoing research study, We reviewed the situation again on 11/12/2020……………..To see what happened…………Please click on Page 2 mentioned on bottom of page to see what happened)
Argha Investment Advisers 