This case study is divided into 3 parts. As different decisions were required during three time periods.
Part 1
We will use this case study as a thought experiment. So let’s think today is 16th February, 2005 and while going through public announcements we come through a delisting announcement of a company named SKF India Ltd.
Public Announcement: On the 11 feb 2005, the company has informed the exchanges about the board of meeting which would fall on the 16 feb 2005 to consider the proposal of the delisting of the company from the both stock exchanges.
Delisting Process
As per our knowledge, typical (on average delisting process behaves in this way):
- There is a Board Meeting where the promoter announces to the board of his intention of delisting. (This is where public shareholders come to know about delisting – through Public Announcements)
- Typically within 2-5 days, The board appoints a Merchant Bank for the delisting and gives approval for the same.
- Within next 4-5 days, A Floor price is decided by the Merchant Bank, (Based on the Law or promoters wish)
- Then shareholders are notified about the same, a date is decided for Postal Ballot voting by the shareholders. Two-third majority is required, out of the total votes cast, for the delisting process to be successful. This process takes around 35 days.
- If successful, then the promoter has 1 year by law, to arrange for the funds required for delisting. As per our limited knowledge, the promoters take around 2-3 months to announce the tendering date.
- Once the promoter announces tendering date, The promoter needs to have 90% shareholding by the end of the tendering period. If the tendering results in his shareholding below 90%, the delisting is unsuccessful.
Back to Case
Share Price Reaction: Only on the intimation by the promoter for the board of meeting for the delisting , the price had shot up from 150 ie on 8 Feb 2005 to around 200 levels i.e on 15 Feb 2005. At this point of time there was no official approval by the board of directors.
As already mentioned in the starting, today On 16 Feb 2005, The board of directors gave approval to the delisting
process.
Upside Odds
Let us try to determine the odds of our upside. We use this model which is still evolving, however you may use a different thinking model.
1.Promoter’s Capital Capacity .
A) Large MNC and Less Capital Requirement For Delisting :AKB SKF already holds 53.58 percent shares in the company. The company is one of the world’s largest players in bearings market. Basically, it is a MNC which wants to delist its Indian subsidiary. AKB SKF have sales of around
RS. 29133 Cr with net profit of around 1950 CR as per 2005 annual report. On other hand SKF India had market cap of around 700 cr. Out of which around 54 percent already hold by the promoter so remaining 300-400 CR acquisition
for the delisting won’t be much problem for the promoter considering its size.
B) Low P/E : Price to earning is around 12 which is not that high from promoter’s viewpoint.
2.Shareholding Pattern.
As we said earlier, 54 percent shares are held by the promoter. The promoter needs to reach the 90 percent holding by law to declare the discovered price. So additional 36 percent share needs to get tendered out of remaining 46
percent shares.
Let see the break-up of remaining 46 percent of shareholding.
a) Public shareholding ( less than 2 lac worth shares):- 22 %
b) Institutional Investors ( Not a single hold significant holding):- 24%
As per our own experience, shareholding pattern of promoters generally fall into 3 categories:
A) Below 30% B) Around 50% C) Around 75% and above
In the reverse book building process , high exit price won’t be much problem and but the requirement to reach 90 percent holding to declare the exit price could be problem as the remaining 46 percent was holding by the
various small investor ( both retail and institutional).
As per shareholding pattern we are not into very risky category, but we are not into very safe or good one too. Overall we feel having an MNC promoter, compels really increases the odds of having a successful delisting (As there are high chances price won’t be a problem for them).
Downside
Risk (Pre Announcement Price):
Price had already reacted 33 percent so if any thing goes against the delisting process like for some how reason the promoter himself would refuse to delist. Then in that case we could loose around 25-30 percent of the capital. If
the price had not reacted the risk would be less.
Floor Price:As on Today there is no floor price, but we can get a rough idea about what is the minimum from the Law. As per Sebi Delisting Guidelines, 2003:
“The offer price shall have a floor price, which will be the average of 26 weeks traded price quoted on the stock exchange where the shares of the company are most frequently traded preceding 26 week from the date of the public announcement and without any ceiling of maximum price.”
This comes out to be around 150, which is similar to the Pre Announcement price.
Conclusion:
Overall the situation, presents an interesting opportunity in the form of an MNC promoter having very high odds of paying a high delisting price thereby reducing the chances of failure of the delisting process. Though seen from shareholding pattern perspective we are neither in very good nor in very bad situation.
We think based on our thinking model, position should have been taken on the next day. This is not the only correct way, you may have a different opinion. However, we would love to know why and what you would have done differently. This way we all may learn together.
May we all learn together.
Part 2…….
(If you want to know what happened next please click on Part 2 on the bottom of the page.)
Argha Investment Advisers 