Tuesday, November 11, 2008

Dabur Pharma & IL&FS Investmart - Two to Tango - Arbitrage Bet


I had written earlier on the potential arbitrage opportunity in Dabur Pharma and here on how it almost didn’t play out. The arbitrage has become far more attractive now.

Dabur Pharma
A quick recap. Dabur Pharma was acquired by Fresenius and it made a open offer at Rs 76.50 and acquired the mandatory 20% in the open offer. Fresenius’s stake post the open offer is 90.89% in the company.

IL& FS Investmart
IL&FS Investmart was sold off by Etrade to HSBC which wanted to expand its securities business in India. HSBC also made the mandatory 20% open offer at Rs 200. Its stake post the open offer in ILFS Investmart is 93.86%.

So what is the bet?

In both the cases the public shareholding has fallen below 10% post the open offer and according to SEBI both the companies have to either delist or the respective promoters have to offload their stake to bring it down below 90%.

In the event of the company delisting then as per SEBI rules the last open offer price has to be offered to the remaining shareholders to exit for a period of 6 months after delisting.

What are the potential payoffs?

Dabur Pharma
Current Price – 38.5
Exit Price - 76.5
Delisting Return - 98%
Potential Downside - 20%

ILFS Investmart
Current Price – 84
Exit Price - 200
Delisting Return - 138%
Potential Downside - 20%

Possible scenarios

1) Both get delisted - Returns - 118% ( Too good to be true :-)) – Probabaility – 25%
2) Dabur delisted, ILFS stays listed - Return 39% - Probability – 25%
3) ILFS delisted, Dabur stays listed - Return 59% - Probability – 25%
4) Both stay listed - Return (-20%) Probability - 25%
Potential Payoff - ( 0.25*118% + 0.25*39% + 0.25*59% + .25*(-20%) )= 49%

Disclaimer - I have a position in both the stocks and kindly do u r own due diligence before taking a decision.

19 comments:

Rohit Chauhan said...

hi ninad
any reason for doing a joint probability ? will not doing probability analysis for each independently make sense as both a different companies with very low correlation

that being said, the odds seem good for both the companies

regards
rohit

Ninad Kunder said...

Hi Rohit

You are right that the correlation is low, which is why I have looked at it as joint probability.

It is effective portfolio diversification. Even if one of these play out considering the upside is pretty high, the portfolio of arbitrage deals will make money.

Cheers

Ninad

Anonymous said...

Hi Ninad,

Well, this is actually a comment about Repro. I got a link to your blog via Rohit's (which I have been following from the beginning of this year).
There is a similar company (but careful, it's more of a growth play) - Vakrangee Softwares. he beauty of this is: it's not really a software. They are into Print and Documentation management services. If you ever do take a look at that, let me know what you think about them :-)

Regards, Prashanth

Anonymous said...

Hi Nirad,

Do SEBI have time limit for promoters to reduce their share holding below 90% or delisting from the date they own more than 90% share?

I am thinking why promoters accepted all the shares knowing it will increase their share holding to more then 90% - even though they had the right not to accept 100% of offer....I guess they had plan of buying the rest of shares.

Amount required for buy out the remaining shares is not great approx 86 crore for IL& FS and 109 crores for Dabur.

Looks like good opportunity...only issue for me is time to complete the deal.

Thanks
Prashant

Ninad Kunder said...

Hi Prashant

Thanks for dropping in. Will check on vakrangee software and come back to you.

On SEBI norms I think the period is 6 months within which either the stake has to be bought below 90% or the delisting process needs to be carried out.

Cheers

Ninad

Anonymous said...

Hi Ninad,
Sorry if i am asking the obvious.
How did you arrive at the figure that potential downside is 20% for both of these scenarios.

Amit

Ninad Kunder said...

Hi Amit

Dont worry not very obvious :-). To be honest it is a guesstimate based on the current price, fundamental value and the discount to what the acquirer paid for these companies.

So my take is that in terms of price correction the downside could get restricted to 20% from these levels.

Cheers

Ninad

Anonymous said...

Hi Ninad,

I am a novice to play out such artitrage opportunities. But after going through the details, I am planning to go ahead with your idea. Here I have few queries regarding that.
1- During an Open offer from a company how the remaining shareholders surrender their shares to the company? Do we need to apply through some physical forms to the comapanies or what is the procedure?
2- How the company is going to pay the money? Are they going to do ECS directly to the account?

Please let me know if there is any link to the above details.

Thanks in advance for your time in ansering my queries.

Warm Regards
Gcpradhan

Anonymous said...

Ninad, sorry 1 more query !
3- If both stay listed then potentila loss is -20% and that is only if the cmp goes down 20%. If don't go down, then we may be able to sell at bearkeven after some time. Is my understanding correct?

Ninad Kunder said...

Hi GCpradhan1

During a open offer u do a off market transaction by transferring stock from your account to the predesignated account that has been stated in the offer document. The Dp instruction booklet carries a off market portion. It is like writing a cheque from your account to somebody elses account.

There would be a open offer form which needs to be filled in along with a copy of the dp instruction and submitted to the registrars of the issue.

Post acceptance either a ECS or most likely a cheque is issued to you for the stock that has been accepted and the remaining stock is transferred back into your DP account.

I will attach a copy of the Mather & Platt delisitng offer document which will give you a flavour of the same.

The link is
http://groups.google.co.in/group/investing-values

I have uploaded the offer docuemnt by WILO which is the parent company for Mather & Platt

Trust this answers u r query

Ninad Kunder said...

Hi Anon

You are right if the stock doesnt go down one can sell it at break even.

I have to be conservative factored in a 20% downside in the stock.

Cheers

Ninad

Anonymous said...

Hi Ninad, thanks a lot for the detail information. Now I am going through the WILO document.

Thanks a lot again.

Gcpradhan

Anonymous said...

Hi Nanad, I was going through the Open Offer from the NTT DOCOMO for the TTML shares upto 20% dueing Jan 2009. Considering the CMP of 19.70 and the offer price of 24.70 there is a possibility of 25% potential profit this trade is carried out. Can you please let me know if this is a good oppertunity and if not what are the concerns. Thanks a lot again in advance for your prompt reply as always.

Warm Regards
Gcpradhan1

Ninad said...

Hi Gcpradhan

The key in a open offer is to look at the % of shareholding that would get accepted.

I havent had the time to look at the deal but from what i remember public shareholding would be around the 50% mark in TTML. So for every 100 shares that u would tender only 40 will get accepted which will generate the 25% return that u have stated. However the remaing 60 shares that would come back will have to be sold at the prevalent market rates.

So post the offer if the stock prices goes down u will wind up booking loss on the remaining holding. The key is to figure out whether the gain would be higher than the loss.

Trust this answers u r query.

Cheers

Ninad

Anonymous said...

Hi Ninad, thanks a lot again for your valuable information. Now I came to know how this TTML case is not an opportunity ! In fact this way I want to learn from you people. So please bear with me for trivial questions.

Warm Regards
Gcpradhan1

Anonymous said...

i. Thanks for the enlightening posts. Missed out on Bhilwara Spin although had seen the PA last weekend. ii. Reg the buyback of Eicher Motors, at the cmp of Rs. 222 and the fixed buyback price of Rs.691.68, probable decent gains appear to be likely assuming the share price doesn't fall drastically post buyback. Also will the buyback be through the exchanges or otherwise? Any expert views on this buyback? iii. In Dabur - Fem care case, what will the buyback price be (same as that offered to the promoters @ Rs. 800 per share)? Your thoughts pl? Seems with this 20%, Dabur India too will reach 92.15% post offer.
Thanks in advance for your replies.

Ninad Kunder said...

Hi Anon

1) I havent gone thru the Bhilwara spin open offer.

2) On Eicher Motors one would need to understand the nature of the transaction covering the sale to Volvo. Will analyse and come back on it.

3) The Fem care transaction post the open offer will result in Dabur holding over 90% stake. I would however not ascribe a high probability to a delisting. Most likely Dabur would merge Fem Care to itself similar to what Mahindra and Mahindra did with Punjab tractors.

Trust this answers u r queries.

Cheers

Ninad

Amit said...

Hi Ninad,

Just came across your blog recently..good read indeed!

Just did a quick search on the two arbitrage opportunities mentioned here..Dabur Pharma has apparently decided to allot equity shares which will dilute the majority shareholding below 90%..so I guess this one's gone

Do you think HSBC could do a similar thing with IL&FS? Given that the stock price is about a third of the open offer price?

Ninad Kunder said...

Hi Amit

Thanks for dropping in.

I have been off the blog for the last few months bcos of work constraints so havent put in updates.

You are right on Dabur pharma, Fresenius went ahead and made a private placement and diluted their stake to below 90%.

Your guess is as good as mine on HSBC's moves.I had played out a few probabilities on possible scenarios. Lets see how it plays out.

Cheers

Ninad