Thursday, June 11, 2009

Gwalior Chemicals - Special Situation

Gwalior Chemicals announced on the 8th of June that it was selling its chemical business to Lanxess. The total enterprise value of the deal is Rs 536 crores with Lanxess taking over debt of Rs 156 crores. The equity value accruing to the company would be Rs 380 crores. The company would be still left with a plant at Ankhleshwar.

The management has gone on record saying that they intend to return 100 crores out of Rs 380 crores to the shareholders either thru a one time dividend or share buyback.

The current equity capital of the company is Rs 24.67 crores.

So we are saying that the shareholder will accrue a sale value of Rs 154 per share out of which the company intends to return approximately Rs 40 per share either in the form of dividend or share buyback.

The current stock price of the company is Rs 92. A classic Graham opportunity. Either the market hasn’t figured this out or there is something that I m missing here. Looks like a very attractive deal.

20 comments:

Anonymous said...

Hi Ninad

The market might not be happy about the uncertainity concerning the remaining cash as to what the management will do with it.

Pankaj

Ninad Kunder said...

Hi Pankaj

You are right on that count but for me the bigger trigger is when management distributes the 100 crores either thru dividend of share buyback.

On the current market cap of about 230 cores management will distribute 100 crores. So against the remaining market cap of 130 crores we will have about 280 crores of cash and the Ankleshwar plant which in my opinion would generate maybe 50-70 crores of topline at a 7- 9% net margin.

I just think that the margin of safety is pretty high even if the management destroys some value or siphons out cash in the cash deployment process.

Ninad

Aseem Kapoor said...

Makes sense its a great deal.Not sure what business will the company have at Ankhleshwar after it has moved the chemical business.

Ninad Kunder said...

Hi Aseem

Its not moving out of the chemical business. It is selling off certain segments of the chemical business and the plant associated with it.

The Ankleshwar plant will continue to manufacture chemicals and they are looking at deploying the cash into certain speciality chemical products.

Cheers

Ninad

Neeraj said...

hi Ninad..
coupla points i think shud be considered..
1) they distribution to shareholders is not going to be ALL dividend..its dividend and/or buyback. i think it would be spilt 50-50..20 bucks one time dividend and remaining 50 crores for buyback..(very small though)
2) the company is also going to invest in the power business. not just specialty chemicals business. that also needs to be considered.
cheers
neeraj

Ninad Kunder said...

Hi Neeraj

I have considered the points that you have put across.

1) I know it will be a mix of dividend and share buyback. As a matter of fact I would prefer share buyback over dividend.

I might in the next few days put up the excel on possible scenarios and the return that can play out.

2) They historically had windmills and it has got sold off as a part of the sale process to lanxess. i would presume that it would on simialr lines.

Cheers

ninad

Anonymous said...

Hi Ninad, nice opportunity it seems. I am looking forward for your excel analysis, which you did earlier also for IL&FS and Dabur also.

Regards
Gcpradhan

Ninad Kunder said...

Hi Gcpradhan

Should be posting it in a few days.

Cheers

Ninad

Anonymous said...

who gets to keep the cash post buyout?

Anonymous said...

Hi Ninad,

Any idea how much cash gwalior chem hold on their balance sheets?

Ninad Kunder said...

Hi Anon1

The management has announced that they intend to distribute upto Rs 100 crores of the cash to shareholders.

The remaining cash will get reinvested into the power and speciality chemical busines.

Hi Anon2
Beyond the cash coming thru on accord of the lanxess deal, I dont think there isnt any other cash on the balance sheet.

Cheers

Ninad

sajanvm said...

Hi Ninad

The board meeting for the div/share buyback was supposed to be held on 17th Sep, which got postponed to 23rd. Now,they have announced that it is postponed to a later date..
There might be nothing to it, or there might be a lot to it...
Rgds
Sajan

Ninad Kunder said...

Hi Sajan

17th was the AGM date on which I think they announced that the div / sharebuyback would be decided by a board meeting on the 23rd which has now got postponed.

I was on a break so wasnt able to track. Will see if I can get a update from the company.

Cheers

Ninad

Ragupati Chandrasekaran said...

Ninad (and everyone else that's interested in this situation),

From talking to the company's IR, it turns out that management had to make an unscheduled foreign visit. They are expected to be back in a couple of days. We should get an announcement on the special board meeting re. the proposed one-time dividend and buy-back once they are back.

Best,
Ragu

Ninad Kunder said...

Hi Ragupati

I also spoke to Sanjeev pathak the company secretary and Oct 15th looks like the timeline for the announcement to take place as the directors are still not back.

Cheers

Ninad

Mayank said...

Hi Ninad,

I was wondering why has Morgan Stanley sold around 4L shares on the 2nd of Sept.

Regards,
Mayank

santosh said...

Mayank has a valid question, which is worrying me. Why such a bulk sale when the cash offer is nearing. Does morgan stanly know something which we are missing out?

Ninad Kunder said...

Hi Santosh / Mayank

Its a fair concern and whether Morgan Stanley knows something that we dont know. Incidentally they increased their stake around the same time that Goldman exited after the deal got announced.

There could be multiple reasons for their exit and to be honest it would be purely speculating.

Cheers

Ninad

santosh said...

The Buyback deal is on. This is an artbitage opportunity. Anyone knows what the promotores are planning? They dont have any operating assets now after the sale to Lanxess. If they wanted to do specialit chemical business again, why would they want to change their GeeCee Ventures. Does it mean it is going to venture in business they have no idea ?

Ashish Kila said...

dont have answers but more q's

what do you do when you sell off your main businesses
1. cash war chest can be used for acquisitions like Malvinder of Fortis
2. You distribute the excess back to share holders assuming they can earn better rates of return

Now, Gwalior Chemicals promoters try to do a lot of things together
They announce plans to invest, dividend, a buy back offer ... signal price of 120 ....
offer their own shares also, so basically the retail will get crowded out
2.46 cr shares on a offer of 40 lakhs shares ... roughly 16-17% acceptance ratio....

Then you have lot of insider trades, sast's ....Mauritius funds (PN route)....
(Remember Marg lot of FII holding..../stock crashed 90%....allegedly promoter money rerouted thru PN's)
promoter is not in a share trading business .... or are they ....

Corporate GOvernance always is an issue with such companies ...(Eg. Temptation Foods)
MCA orders review of financials
http://www.moneycontrol.com/news/business/mca-orders-account-reviews5-cos_440296.html

the share has also come down because of insider selling since May

In a nutshell,
the only reason why the stock trades below cash
basically the stock mkt is doubtful whether the remaining cash will be utilised properly, siphoned off, minority investors wont get to see much of it....

with marquee names like Reliance holding % stakes .... it is not a problem of hidden value and no catalyst in sight....
why doesnt Reliance acquire it in hordes ....make an offer for the entire company ...wind it up and keep the cash
it confounds me even more.....
3
Reliance Capital Trustee Company Ltd A/c Reliance Growth Fund1,583,000 6.41
4 Reliance Capital Trustee Company Ltd A/c Reliance Growth Fund482,754 1.96