Friday, June 12, 2009

Dabur Pharma & IL&FS Investmart Update

I had in the month of November written a post on a potential arbitrage opportunity covering Dabur Pharma and IL& FS Investmart.

A lot of water has since flown below the bridge and due to the fact that I have been irregular on the blog I didn’t put out a update on the opportunity.

The basic premise was the fact that post their respective open offers the promoter holding on both these companies had crossed the 90% mark. The bet was that either the promoters would have to sell their residual stake and bring it below 90% or delist the company. In case a delisting was to take place then the promoters would have to offer the last open offer price to the remaining shareholders.

I m listing down what was the potential payoff matrix at that time.
Dabur Pharma
Current Price – 38.5
Exit Price - 76.5
Delisting Return - 98%
Potential Downside - 20%
IL&FS 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%

Now the update on this arbitrage bet.

Flawed understanding
My understanding of the process was flawed in terms of what happened when promoter holding goes beyond 90%. I spoke to a investment banker who is in the capital markets domain and this is the download that I got.

Delisting happens once the public shareholding fall below the minimum level as defined in the listing agreement. This need not necessarily be 10% but could be higher at 25% also. Once the public shareholding falls below the minimum level then as per the delisting laws the exchanges will give the company one year to comply with the listing norms. The promoter in the meantime has to either dilute or make a reverse bookbuilding offer for delisting. The price that is thrown up through this is the price at which delisting will take place.

Dabur Pharma Update

Fresenius Kabi which chose to acquire Dabur Pharma chose to dilute its holding by making a preferential allotment to Atlas – Vermoegensverwaltungs at a price of Rs 44.95.

This enabled them to bring down their holding to the 90% mark and continue with listing Dabur Pharma which has now been renamed as Fresinius Kabi Oncology Ltd.

The original premise of the arbitrage didn’t play out in this case. However the current stock price of Dabur Pharma is Rs 50. A return of about 30% over the investment price of Rs 38.5.

IL&FS Investmart Update
In case of IL&FS there has been no update with HSBC not making a move either in diluting stake or a delisting offer.
However the last few days the stock has been gradually moving up on the circuit. Maybe the market is smelling some corporate action playing out. The stock is currently at the Rs 140 mark generating a return of about 66% on the invested price. Waiting to see how this arbitrage plays out.

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