Thursday, April 15, 2010

HSBC Investdirect - Delisting

I had created this note on HSBC Investdirect's delisting around end of January 2010. I had also invested in the stock around the same time.
I have a history of investment in this particular counter betting originally on the delisting happening. Links to those post are enclosed below.
1) This was betting on the delisting in Nov 2008.
2) Subsequent posts when the delisting got announced and my exit

The note that I had written in Jan 10
Opportunity Type - Delisiting
Company: HSBC Investdirect
Exchange - BSE
CMP - Rs 231
Equity Base – 70.39
Current market Cap - 1626
Public shareholding – 6.89%
Free float - 112 crores

HSBC InvestDirect was originally floated by the ILFS group and was called ILFS Investmart.
Historical Milestones
• HSBC acquired IL&FS Investmart from the IL& FS group and acquired 73.21% stake by a share purchase agreement.
• It subsequently made a open offer to acquire 20% of the shares by its letter dated May 20th 2008 at a price of Rs 200.
• On completion of the open offer HSBC raised its stake in the company to 93.86%.
• Having acquired 93.86% stake which is higher than the listing agreement, HSBC had to either dilute stake below 90% or initiate the delisting process.
• Company name changed proposed from Il&FS investmart to HSBC Investdirect by a board resolution in April 2009.
Delisting Milestones
• HSBC initiated the delisting process on June 16th 2009 on receipt of a letter from the promoters to initiate the delisting process.
• Notice of postal ballot for shareholder approval was despatched on June 26th 2009
• Result of postal ballot with the approval of shareholders was acquired on July 28th 2009.
Milestones Pending
• Filing with exchanges for delisting approval. - Approval process takes 15 days post filing.
• Initiation of reverse book building process for arriving at the delisting price - Process takes one month post receipt of approval from exchanges
• Acceptance of the delisting price and despatch of acceptance amount - 15 days post the reverse bookbuilding process.

Current Holding Structure
Company - HSBC InvestDirect
Promotor – HSBC group - 93.86%
Public
Mathews Fund – 2.05%
Deutsche Mutual Fund – 1.21%
Other public shareholders - 2.88%

Delisting Laws
There are two important criteria in the delisting laws
• The promoters have to acquire a minimum of 50% of the public shareholding when arriving at the reverse bookbuilding price.
• The promoter stake should go above 90% post the delisting process.
In the case of HSBC Investdirect, the stake of the two institutional holders would be sufficient to cover for the 50% criteria. HSBC anyway holds more than 90% of the stake to fulfil the other criteria.

Deal Analysis
In any special situation case there are three important risk to be ascertained.
1) Price Risk - Deutsche mutual find which is one of the large shareholders had acquired its stake post the delisting announcement in the 260-270 price band. That effectively creates a floor for the delisting price. Our estimate is that the delisting price would be in the 315 -325 mark.

2) Time Risk - HSBC has to complete the entire process within 12 months of the board resolution which will expire in June 2010. So effectively we have about 4 months as the outside time limit on the deal.

3) Deal Risk - The delisting process has got delayed so far because with new SEBI amendment in the takeover code the company has to extinguish all convertibles like GDR’s, ESOP’s etc before it carry’s out the delisting process. The company has existing Esop’s which need to be extinguished and hence there has been a delay in the process. Our understanding post talking to the company secretary and the merchant banker is that they would be able to manage the timeline.

Return Matrix
Scenario 1 - Exit thru Bookbuilding Process
Current market Price – 231
Exit Price – 325
Period ( months ) – 4
% Absolute return - 40.7%

Scenario 2 - Exit prior to bookbuilding Process
Current market Price – 231
Exit Price – 280
Period ( months ) – 2
% Absolute return - 21.2%

Current Update
The company has managed to overcome the ESOP hurdle and made the public announcement on the delisting schedule. The reverse bookbuilding is to open on the 28th of April and will close on the 5th of May. Post the PA the stock jumped from the 230-240 band that it was trading at to the 280-285 band. I bought some additional position ( thought my major position was built in the 230-240 range) at the 281 mark factoring in the clear timelines and my expectations of 6-7% return from here in a months time.

10 comments:

Atul said...

hi

thanks for the post and other posts as well.

I have a really silly question...if i buy these shares through an online broker ( i.e. icicidirect) how do I tender them in reverse book building process? I did call icicidirect guys and they told me that I will have to contact company's registrar directly and it will be a complete off-line process.

Is it the way it is normally done or can it be done online also?

Regards

Atul

Ninad Kunder said...

Hi Atul

The company sends u the reverse bookbuilding document. It cant be done online. One has to transfer the shares offline into a designated DP account as listed down by the company in the offer document.

Post transferring, attach a copy of the DP slip along with the RBB form in which u specify the price at which the stock is being tendered to the registrar of the issue. In case your price falls within the accpeted price the company will send across the consideration else transfer the shares back into u r DP account.

Trust this answers u r question.

Cheers

Ninad

Atul said...

Yes ..it does.. thanks a ton !

Amit said...

Hi

Just wondering how you arrived at RS 315-325 as the likely deslisting price. The company has been performing very badly. The last open offer was at 200 and the deal size for HSBC to delist is close to $ 30 MM which is a huge amount even for HSBC. There is a possibility that they may not accept the price discovered and then the price will just plummet. Basically they may try to frustrate the minority shareholder by leaving them with a worthless share for some years and then delist at much lower price.

The risk-reward seems dangerous.

Ninad Kunder said...

Hi Amit

Valid points. However i dont think 30 million is a large amount for HSBC to manage.

This is really subjective in terms of how we analyse a situation and each one of us will have a diff view. My take is I dont think HSBC will want to live thru the nuisance of a listed company when it can work towards acquiring the miniscule 7% at not too much premium.

I agree the company performance has been down hill but there has been a lot of clean up that HSBC is doing. But i will agree with you that there isnt too much valuation comfort.

Cheers

Ninad

Aman said...

hi, excellent blog, have visited for the first time. when is the entire process expected to finish. coz i have not received the documents yet. also could u also throw light on the taxation if we participate in the open offer.

Ninad Kunder said...

Hi Aman

Thanks for dropping in.

The offer document has been sent across to the shareholders and I have received the same.

http://www.nse-india.com/marketinfo/companyinfo/online/corp_announce.jsp?symbol=HINVDIR&desc=Public+Announcement+-+Delisting&tstamp=130420101550&

The document is available on this link on the NSE site.

On the taxation front u will have to pay short term/ long term capital gains tax which is applicable for trade done in a off market deal without paying STT in case u tender in the delisiting offer.

Cheers

Ninad

Cheers

hvg said...

Hi

Thanks for posting this analysis.

however, the junta will be happy to know your rationale behind arriving the price band of 315-325 and not something else...why not 295-305 or some other arbitrary price..

the reply you have given to Mr. Amit above is more of a abstract reasoning can we have something calculative...

hope i m not asking too much ...

Appreciate your time and energy...

Rgds
HVG

Ninad Kunder said...

Hi HVG

There is no exact science to justify the prices. Its a lil bit of guesstimate based on what the market participants will look at.

Deutsche has acquired the stake in the 270 band after the delisitng announcement and has almost held it for a year. So i would expect them to look at atleast 10-15% return on their investment else why would they enter the transaction hence the price band in 315-325 range.

But like i said it is a guesstimate.

Cheers

Ninad

ashwin said...

hi,
i have 500 shares in holding & the date is also done now what should i do now , pls suggest....


ashwin