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.