Let us assume for the purpose of this case study, that the date today is 7th January, 2021. While going through public announcements you come across a delisting case study by the name of Revathi Equipments Ltd.
Public Announcement: On 3 January 2021, the company has received a letter from the Renaissance Advanced Consultancy Limited RACL (Promoter) and Hari Investment Private Limited ( Member of Promoter group). In the letter Promoters have expressed their intention to acquire all fully paid up equity shares that are held by the public shareholder and consequently voluntarily delist the equity shares from the Stock exchanges (BSE and
Before going further lets remind ourselves of the 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
Company: Revathi Equipment Ltd (REL) is engaged in the manufacturing of drills for the purpose of mining , construction, water-well , exploration etc. Major clients – Coal India , Tata steel , NMDC. REL further have subsidiary named Semac Consultants Pvt Ltd which is engaged in the architecture and engineering designs.
Share Price Reaction: Between 4 January and 7 January the stock price has reacted around 28 percent ( from 460 to 590 making a high of 640).
Board Appoints Merchant Banker: Today (7th January,2021), the Board of Directors have appointed the merchant
bank for due diligence report and only after that Board of Directors can give approval.
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.
A) Promoters Background: The promoter belongs to Renaissance group founded by the Abhishek Dalmia ( Dalmia family into Cement Business) in 1999 and run in the style of Private Equity . The group approach to investing is more in the Berkshire Hathaway mould, wherein they tend to hold the investments permanently , with rare exception.(Source: Website). Seems like the promoter is very market savy which means there are less chances of promoter paying exceptionally high price in delisting.
One of the major filter they use in acquiring businesses is that the enterprise value should in the region of the 100 CR so this 50-80 CR acquisition of public shareholder would not be major hindrance for the promoter considering his size of the transaction he normally indulges in.
B) Valuation: Another viewpoint about the valuation of the company is Scheme of
arrangements (corporate restructuring) which was going from the past few months in the company and got terminated by the promoter on 12 December 2020. In the Valuation segment of that process the company itself put a valuation tag of around 692.5/shares on the Revathi Equipment ( One can access the valuation report on the company
Now the price is @ 590 levels and promoter being market savvy and as per the valuation report and as per size of the promoter there are good chances of discovery of high exit price.
Promoter Shareholding: As on 3 January 2021, the Promoter hold 72.58% of the equity share of the company and Public shareholder held 8,40,990 equity shares representing 27.42% of the company. The meeting of the Board of
Directors had held on the 7 January 2021 to consider the proposal by the promoter.
The promoter needs to reach the 90 percent holding by law to declare the discovered price. So additional 18 percent share needs to get tendered out of remaining 27 percent shares.
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
Since it falls in the C category, as per our limited model the odds are better than the other two categories. However, another viewpoint needs to be considered, (How may number of shareholders are there?)
Out of 27.42% public shareholders , around 90% shares are held by the 4630 different shareholders. Now the delisting process to get through at least 17.42% of the public shareholder need to get tender the shares other wise the delisting process stand cancel on the ground not enough shares tendered. In that 17.42% public shareholder role of the 4630
different shareholders is very important.
As of now we do not have much experience regarding this viewpoint hence we do not want to take sides regarding the number of shareholders. (However we would love to know your opinion)
Risk (Pre Announcement Price):
If risk unfolds then we as arbitrager in the delisting process stand to loose around 25-30 percent on our capital ( as the price of the pre delist announcement is 25-30 percent down from the current level. As this is not exact loss but loss can be in this range.
At this stage we do not know, how much price the promoter will offer to get the shares delisted. However, we can know the minimum share price the promoter has to offer according to the law. Let’s look at what the law states:
As per SEBI (Delisting of Equity Shares), Regulations 2009 –
The offer price shall be the highest of,
(a) the highest negotiated price per share of the target company for any acquisition under the agreement attracting the obligation to make a public announcement of an open offer;
(We think this does not apply to our case – As there is no offer for acquisition of our company)
(b)the volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any person acting in concert with him, during the fifty-two weeks immediately preceding the date of the public announcement;
(Not applicable as there is no such acquisition in said time)
(c)the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, during the twenty-six weeks immediately preceding the date of the public announcement;
(Not applicable as there is no such acquisition in said time)
(d)the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the date of the public announcement as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, provided such shares are frequently traded;
(This can be find out by taking the data from NSE volume data of between the respective dates i.e. 08 Oct, 2020 to 2 Jan, 2021 and answer comes out be 460.15)
(e)where the shares are not frequently traded, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies; and
(Not applicable as shares are frequently trading on both exchanges)
(f) the per share value computed under sub-regulation (5), if applicable
—“Explanation: The reference date for computing the floor price would be the date on which the recognized stock exchange/s were required to be notified of the board meeting in which the delisting proposal would be considered.”
(In our case this date is 3rd January, 2021)
And the Floor price would be approximately around the 460 of Revathi Equipment ltd.
Now considering both the upside and downside odds, We think this situation can be invested and some risk can be managed by investing less than the standard allocation
- as it seems the promoter won’t pay a very high price (Or act like a MNC)
- There is around 25-30% risk of loss of capital (This can be managed by allocating less)
However, we would love to know your own viewpoint and why you may differ. Since this is an ongoing case study further parts of the same may be updated as we progress further in time with the situation.
The purpose of these cases studies to help all of us learn and practice become better investors/traders. It’s good to practice before the real match.
Please don’t use these case studies as an investment advice. Consult your own financial advisor. Many important things like allocation are missing in them.
May These case studies be helpful to all! May we all learn together!
If you want to see what happened please proceed to part 2.