Monday, August 18, 2008

Arbitrage Trade Gone Wrong ( Almost) - Dabur Pharma

I spotted a potential arbitrage opportunity last month in Dabur Pharma and invested on that basis. Let me list down the chain of events.

1) Dabur Pharma got acquired by Fresenius as the Burman’s exited the business. Fresenius made a open offer for the stock at Rs 76.5 per share.
2) The open offer opened in June 20th and ended on July 09th
3) Fresenius before the open offer by way of share purchase agreement bought 73.27% stake in the company.
4) 25th July - The post open offer status was communicated to the exchanges. The company had managed to garner 17.62% shares in the open offer and had increased its holding to 90.89%.
5) The stock ended 25th July at around Rs 61.50 which was a Friday and the announcement was done post market hours.

Investment Rationale

Having garnered 90.89% stake, as per SEBI norms the company would have to delist its shares as the public shareholding was less than 10%. There were two possible possibilities here

1) Option 1 - Fresenius choses to delist Dabur Pharma in which case the remaining shareholders have to be provided a exit at the last open offer price of Rs 76.50. This was a clean 24% return on investment in a 2-3 month horizon.

2) Option 2 - Fresenius choses not to delist Dabur Pharma in which case it would have to sell its stake so as to bring it below 90%.

I betted that Option 1 is what Fresenius would go with. While putting together the initial share purchase agreement Fresenius assiduously went about acquiring shares from all possible significant shareholding group and not just the promoters. It acquired stake from IFC ( International Finance Corporation) and also acquired all ESOP’s that were issued to employees something that it didn’t have to go about doing.

Also Fresinius already had a 100% subsidiary in India called Fresenius Kabi India Pvt Ltd so it made logical sense to go that route.

I bought the stock on Monday / Tuesday in the price range of Rs 61.50 – Rs 62.5.

Events post that

1) 11th August - The erstwhile board of directors along with the CEO resigned and a new board was elected driven by Fresenius
2) 11th August - The new board on the same day acknowledged receipt of a proposal from Fresenius Kabi AG to jointly develop business, increase operational efficiencies and provide access to markets for products manufactured by Dabur Pharma.
3) On the same day in a press conference in Delhi Rainer Baule the CEO of Fresenius Kabi stated that Fresenius will invest 30 million Euros in Dabur Pharma to double capacity. He also said that the company will sell 1% of its stake to a strategic investor to keep Dabur Pharma listed.

There went my arbitrage trade though there is still no official announcement on this. Luckily the stock went up post this announcement and currently hovers around the Rs 68 -69 mark. I have a 1 month compliance issue before I can sell the stock and intend to sell post that.

Though the fundamental story might be good and the stock could potentially go higher but that is a independent assessment. I wouldn’t want to rationalise a arbitrage call into a fundamental call because the arbitrage story might not play out.

7 comments:

Anonymous said...

Hi Ninad,

I have a small doubt! If you buy the shares on the date of the open offer, will you be able to take part in the offer?

Kiran

Ninad Kunder said...

Hi Kiran

Yes, u would be eligible to take part in the offer. You might however not receive the offer documents and might have to download that from the company's website or NSE/NSDL.

Cheers

Ninad

Anonymous said...

Is it usually possible to know whether the open offer is going to take place without speculating?

Because of this open offer, is this the only way companies buy shares from the general public?

Kiran

Ninad said...

Hi Kiran

There are multiple scenarios for a open offer

1) Open offer gets triggered because the acquiring entity acquires more than 15% stake in a company and hence triggering SEBI takeover code. The Fresinius - Dabur, Daiichi-ranbaxy etc are examples of such a scenario. In instances like this the open offer is a regulatory requirement hence is predictable and not a speculation.

2)In case the public shareholding falls below 10% for whatever reason then the promotor company has to make a open offer to the remaining shareholder. There is a element of uncertainity if the the promotor group chooses to sell stake and increase the public shareholding over 10% as discussed in the Dabur - Fresinius case.

3) In case a company announces to buyback its shares in the form of a tender offer ( Abbott) and not buyback through open market purchase then there is predictability in terms of buyback of shares.

Cheers

Ninad

Anonymous said...

hey Ninad

Thanks for the explanation!! Appreciate it!

Even though you missed out on the arbitrage opportunity due to delisting possibility, did you take part in the open offer?

Kiran

Ninad Kunder said...

Hi Kiran

The pleasure was mine.

No i didnt. I entered the stock post the open offer completion when I saw the possible arbitrage opportunity.

Cheers

Ninad

Ninad Kunder said...

Hi Kiran

The pleasure was mine.

No i didnt. I entered the stock post the open offer completion when I saw the possible arbitrage opportunity.

Cheers

Ninad