Saturday, April 10, 2010

Micro Inks - Delisting exercise

Micro Inks is the subsidiary of the German chemicals company Huber. Huber announced a delisting on the 9th of Dec. The event unfolded with the following time schedule

1) Board meeting for delisting announcement - 9th Dec 2009
2) Postal ballot result – 16th Jan 2010
3) Announcement of delisting schedule - 3rd Feb 2010
4) Opening of Reverse Bookbuilding process – 2nd March 2010
5) Closure of the reverse bookbuilding process. - 5th march 2010

Risk / Return analysis
Let me run thru the risk/ return analysis of the deal based on the framework that I had put out on a guest post on Rohit’s blog. The link to that is as attached below

1) Time Risk
The time risk in the deal was managed by entering the deal only after the delisting schedule had been announced. So there was clear timeline defined on the trade.

2) Deal Risk
Deal risk in a delisting opportunity could stem from two fronts

a) Inability to garner the requisite shares
In the case of Micro Inks the promoters held 74% of the stake in the complete. For delisting to succeed they had to garner 16% shares so as to reach the 90% hurdle that needs to be covered for delisting to be successful

In Micro Inks, Reliance Mutual fund held 7.23% stake and HDFC mutual fund had 3.69% stake. They along with other institutions held 12.25% stake in the company. This ensured a high probability of the transaction happening.

b) Likelyhood of the discovered price being unacceptable to the promotor
In the case of Micro Inks, Huber launched the delisting offer even before appointing the merchant bankers to the deal. It was a strong cue to the fact that the company was confident that the delisting will go thru. Our assumption was that some kind of indicative price would have been discussed / agreed with the institutions.

3) Price Risk
Huber had defined the floor price at Rs550 for the transaction. I entered the stock around the Rs595 mark. Our assumption was that the deal should close in the 650-675 mark giving a possible return of 10 – 12 % in a 1 month time period. We were also comfortable from the underlying valuation standpoint.

Post deal analysis
The reverse bookbuilding opened on the 2nd of March and I must admit it was well managed by Kotak Securities the investment banker. They had done a good job of sealing the institutions and lo and behold both HDFC and Reliance tendered at the same day around the same time at the same price of Rs 640. This effectively created the anchor price for the delisting exercise.

The company successfully managed to close the book and delist at Rs 640.

I had 2 options
1) Either to exit through the stockmarkets around the Rs 625-627 mark post the closure of the bookbuilding exercise.
2) Wait for the stock to get suspended followed by the delisting and then tender to the company at Rs 640. I chose this option bcos along the way Micro Inks also announced a dividend of Rs 6 with a ex date of 12th April. Considering the current level of markets with not too many alternatives to deploy capital, I was comfortable letting my capital lie here and earn the extra 1% tax free return.

So the way I see it I will wind up making about 8.5% on invested capital in a period of 2-2.5 months. Good for me.

13 comments:

Siddharth said...

Hi Ninad,
Love all your posts on these special situations like delisting. However one general question i had was - why do investors say they managed a return of 120% annually when they make 10% in a month in an arbitrage or special situation case. I mean to do that literally would require 10 such ideas a month. At the end it is just a 10% return whether it materialized over a month or an year. So in that case does it make sense to devote so much time on effort when returns are not very high?? I know that such situations are generally not linked to the market movements which make it safer. But if the same amount of time can be devoted to stock picking wouldn't it offer better returns.

Another question was how do u track or come to know of these special situations?? do u check company notices daily in BSE??

Ninad Kunder said...

Hi Siddharth

Nice points.

The point you put across is extremely valid which is why i quote individual transaction returns and not annualsied returns. It is difficult if not impossible to do 12 deals a year which will generate 10% every month. My target is if I can do 3-4 deals in a year on invested capital and generate 10% on each then I would be really happy.

Let me also tell you that special situations constitute a "x"% of my portfolio and the remaining capital is allocated to long term stock picks. I personally find it worth the time bcos it generates a higher learning curve and there is greater rigour in the process. Not just do u have to see basic valaution comfort but also analyse a deal from all possible angles.

Spl situations also tend to act as a hedge or good avenue to deploy capital when u dont have overall comfort with the market levels. Give me a market at 10,000 i would have minimal special situation allocation.

I used a wide variety of sources but yeah announcements on the exchange is a primary source. I also tend to get leads from friends and readers of the blog.

Ravi said...

Hi Ninad,
Excellent post. The best thing about this workouts is it looks easy in the rear view but need great skills to execute. I never have any difficulty in understanding the posts and cases but never can spot one opportunity when it is available or atleast cannot figure out the risks and the price to pay. Still learning... I have one question. You mentioned you chose option2. How does that work out? Does the company send out some option form to you and you would tender the share to them or you would call up their company secretary or ther investor department?

Regards
Ravi

Vic said...

Thanks Ninad..loved this post. Was nicely explained.

Isn't April 10th little late to share..:-). I mean not from learning but from money making point of view..

thanks,

Vikas

Ninad Kunder said...

Hi Ravi

Thanks for your comment.

Regarding option 2, under regulation 21 of the SEBI regulations, the Acquirer has to provide a final exit option to the public shareholders post delisting at the discovered price. Either the company sends u a offer letter or you have to speak to the company secretary to execute the same.

In case of Innovative Foods, I had to speak to the company secretary and registrar to get it done. In Micro Inks, I got the offer letter yesterday which is open for a one year period.

Cheers

Ninad

Ninad Kunder said...

Hi Vic

The blog tends to suffer due to time constraints. Will try to be more in time on my posts :-).

Should put out a post on the ongoing HSBC Investdirect delisting in a day or two.

Cheers

Ninad

santosh said...

Hi!!
Is there a option 3? Like becoming a private investor of Micro inks. Any idea of whether the company would let investors who do not tender their shares stay around. What would be the expected return on investment? What would be the advantages and disadvantages?

Ninad Kunder said...

Hi santosh

That option is always there. You can hold on the shares. However there is a current case going on in Cadbury's where they invoked a clause under the companies act and were arming themselves to force out the minority shareholders at a price decided by them.

The minority shareholders have taken the matter to court and it is pending there. I havent had the time to understand how they were doing it and the legal standpoint. But will check.

Otherwise u have can hold onto the shares. The way i see it for the next one year there is no question of getting more than rs 640 from the company. Beyond that it is a question of bargaining power and how desperate the promotors are to buy your stake. The flip side is u will be holding a share with no way to exit other than selling to the promotors who might not be keen to provide u the exit.

Cheers

Ninad

santosh said...

Okay so after one year, one scenario would be they may offer more than 640. But it would be bad for an investor if the company doesnt buyback after this or offers less than 640(Scenario 2).

Another query that comes to mind is whether the company will be issuing dividends as usual (or they can getaway without paying any)

And finally if there is not going to be a market quotation how will one identify the price per share for the company.

Ninad Kunder said...

Santosh

Thats right, the promotor has the choice after the one year period to either buy your holding and at what price.

The company can or may not pay dividends as decided by the borad of directors depending on the business plans of the company. It is like any other private company.

No there is no market quotation as the stock has been delisted from the exchanges. The transaction is purely private in nature and dependant on what price you are looking at and what price the buyer is willing to pay.

Cheers

Ninad

santosh said...

Okay. So considering these aspects what would you think would be the advantages for a private shareholder? Would you still prefer to be the private shareholder for Micro inks? If yes, what would be your reason?

Ninad Kunder said...

Hi Santosh

I have exited my position in Micro Inks and tendered my shares to the company.

So I guess that answers u r question

Cheers

Ninad

Sriram said...

Hi ,

I am trying to Sell my STOCK at Micro INks and i am not sure how to do this , I just emailed the 2 addresses that was on the Micro INKS web site , and i did not receive any option form from the company , I would greatly appreciate any information about how to cash the stock