Part 1
For this part let us assume the today is 1st Feb 2019.
Case
Screening: While going through corporate announcements on 26th november 2018, we come to know that HEG LTD has initiated a buyback.
In the board meeting dated 26/11/2018, the board of directors have approved the buyback of 13,63,636 equity shares representing 3.41% of total paid equity share capital @5500/- 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 and may tender upto maximum of 1,27,21,872 equity shares.
“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 29th January 2018, the postal ballot results came out.
99.89 percentage of votes were cast in the favour of special resolution, hence the resolution was approved by the shareholders.
The Company has fixed 9th Feb 2019 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 6-7th of Feb to take decision about participating in the buyback
Yesterday, Public announcement was 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 :- 49,32,082 ( 49.32 lac)
B) General Shareholder:- 3,50,27,060( 3.50 CR) including promoter holding of 2,43,89,979
So total shareholding available for buyback ( Small + General) = .49+ 3.50 = 3.99CR
Entitlement:
As per Sebi law, Small Shareholder will get:
A) Either, their normal entitlement which is (Small shareholders/Total Shareholders * Shares to be bought back) ((.4932/3.99) * .1363) = 1.68 Lac shares.
B) Or, 15% of .1363 CR shares to be bought back. It comes out to be 2.04 lac shares.
whichever is higher, so 2.04 lac shares are reserved for the small shareholders in the buyback and 11.59 lac shares (13.63-2.04) 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 = 11.59lac/3.50 cr = 3.31%
In our case Acceptance ratio for Small shareholders = 2.04lac/49.32 lac = 4.13%
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. We can estimate it using these methods:
A) Pre-announcement price was in the range of 2000-2200.( I have taken the price as on 29th January)
B) Price to Book:Book value before the buyback was (I.e as on Sep 2018) 3200-3226 cr and market cap at that time was in the range 8000-8800cr. As a result, price to book came in the range 2.5-2.75. Since 750 cr would be used for buyback. If we use the same PB then market cap comes in the range 7700-8000 cr , Hence the post buyback price will be in the range 1900-2100.
C) Price to Earning: Current PE was in the range 3-3.3times.EPS would be approx 690 per share.if we see multi-year PE that was in the range 6-6.4 As current is less than multiyear we would take current.Applying the current PE multiple, post buyback price come in the range of 2100-2300.
As per the above guesstimate , the post buyback price comes in the range 1900-2100.
Breakeven Point (Expected payoff)
Definition: Now with the guesstimate of post buyback price and acceptance ratio , we can calculate the breakeven point (price) where there is no profit no loss.
As on 1st Feb 2019, price closed at 2550.
Acceptance under both category are almost equal. The breakeven price is same under both category ie 2400 approx. In the above, the profit would be only possible if the post buyback price be greater than breakeven price. But the post buyback price via model used above is in the range of 1900-2100.
Conclusion
So with break-even price much higher than assumed post buyback price, we would avoid participate in this situation under any category. You may have a different opinion and we would love to know why you think so?
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 know what happened please click on 2 on the bottom of the page.
Argha Investment Advisers 