Part 1
For this part let us assume that today is 4th January 2017.
Case
Screening: While going through corporate announcements on 15th November 2016 we come to know that Balrampur chini has initiated a buyback.
In the board meeting dated 15/11/2016, the board of directors have approved the buyback of 1,00,00,000 equity shares representing 4.08% of total paid equity share capital @175/- per share. The buyback would be subject to approval of shareholder by way of special resolution through postal ballot. The promoters have also expressed their intention to participate in the buyback.
“In Special resolution, the votes cast in favour of the resolution are not less than three times the number of the votes, if any, cast against the resolution by members.”
On 2nd January 2017, the postal ballot result was declared.
99.99 percentage of votes cast were in the favour of special resolution and hence the resolution was approved by the shareholders.
The Company has fixed 13th January 2016 as the record date for the purpose of determining the entitlement of shareholders who will be eligibile to participate in the proposed buyback offer. This means there is time till 10-11th of January to take decision about participating in the buyback.
Yesterday, Public announcement regarding the same has been made by the company.
(Under the General obligation of Sebi law, the company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the board or public announcement of the offer to the buy-back is made)
Before, going to the case let us learn about what does the law states regarding buyback.
SEBI LAW
There is a special provision in law (Sebi Buyback Regulations,2018) for the small shareholder.The provision states that the company needs to take:
A)Either 15% of the total shares proposed to be buyback
B) or the number of securities entitled by them (small shareholders) as per their shareholding.
Whichever is higher.
{Small Shareholders: Shareholders with less than 2 lakh worth shares according to the close price as on record date
General shareholders: includes promoters and other than small shareholder}
Back to Case
Shareholding of Company:
A) Small Shareholder :- 3,50,50 528 ( 3.50 CR)
B) General Shareholder:- 20,96,89 390( 20.96 CR) including promoter holding of 9,99,99,999
So total shareholding available for buyback ( Small + General) = 3.50+ 20.96 = 24.47CR
Entitlement:
As per Sebi law, Small Shareholders will get:
A) Either, their normal entitlement which is (Small shareholders/Total Shareholders * Shares to be bought back) ((3.50/24.47) * 1) = 14.37 Lac shares.
B) Or, 15% of 1 CR shares to be bought back. It comes out to be 15 lac shares.
whichever is higher, so 15 lac shares are reserved for the small shareholders in the buyback and 85 lac shares (100-15) lac are reserved for General ones.
Acceptance Ratio
We will analyse the case on the basis of acceptance ratio. What is acceptance ratio?
Acceptance ratio for minority = Shares reserved for minority/total shareholding of minority that wants to participate in buyback.
In our case Acceptance ratio for General shareholders = 85lac/20.96 cr = 4.05%
In our case Acceptance ratio for Small shareholders = 15lac/3.50 cr = 4.28%
Since the numerator in the above calculations is fixed, calculated as per law, however the denominator part is unknown and we have done the above calculations assuming all minority and majority shareholders will participate in the buyback. However, based on our limited live experience and knowledge this is rarely the case.
Post Buyback Price
There can be only a probable guess of Post buyback Price.
A) Pre-announcement price was in the range of 110-120.
B) Price to Book:Book value before the buyback was (I.e as on Sep 2016) 1350 cr and market cap was in the range 2700-2900cr. As a result, price to book came in the range 2.-2.15. Since 175 cr would be used for buyback. If we use the same PB multiple(2-2.1) then market cap comes in the range 2550cr -2700cr , Hence the post buyback price will be in the range 110-120.
C) Price to Earning: It median PE was in the range 8-8.7. But pre announcement PE was in the range 6.7-7.30. Applying the current PE multiple, post buyback price come in the range of 110-120
As per above conservative guesstimate the post-buyback price would be in the range of 110-120.
(However if you think differently, we would love to know why?)
Breakeven Point (Expected payoff)
Definition: Now with the guesstimate of post buyback price and acceptance ratio , we can calculate the breakeven point where there is no profit no loss.
As on 4th January 2017, price closed at 129.
Acceptance under both category are almost equal. The breakeven price is same under both category ie 127 approx. In the above, the profit would be only possible if the post buyback price is greater than breakeven price but the post buyback price via model used above is in the range of 110-120.
Small VS General
In General 48% is held by promoter who expressed intention to participate. It means that tendering could be in the range of 40-50 percent which could cap the upside. Under Small there is no such cap on the upside. It make sense to participate under Small category.
Conclusion
Considering the payoff matrix, we would allocate 2-3 percent of portfolio. As break even price is in +_5% range of Assumed post buyback price. The allocation remains less as we believe that the predictive power of model in such cases is weak, where there is no clear cut answer. We have less confidence in our model in such circumstances.
Purpose:
The purpose of such case studies is to help all of us become better investors. Cases like these are practice before the main match. Thinking on these various steps can help us develop patterns for what do if these situations would have occurred with us. We would love to know what you would have done in this case?
May we all Learn together
What Happened?
In order to see what happened (Please click on 2 at the bottom of the page)
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