Orient Refractories has a
interesting past and a interesting future. It was born by demerging itself from
Orient Abrasives which is a part of the Rajgarhia group. Orient Abrasives
initiated a scheme of demerger through which for every one share of Orient
Abrasives the shareholder received one share of Orient Refractories. The
company got listed in March 2012 and had a interesting first few weeks in terms
of price movements.
It was a demerger that I had
tracked but didn’t see any potential value unlocking by virtue of the demerger
transaction. What however piqued my interest was trying to understand the
potential driving variable behind the demerger process. The refractories
business was a great business with high ROE versus the Abrasives business which
had poor financial ratios. The thought that crossed my mind was that the
management was looking at selling off one of the businesses though it was tough
to ascertain which one.
Fast forwarding in the month of
May 12 there was a news article in the economic times talking about German
group RHI being interested in buying Orient Refractories, The link is attached
here. The stock of course rose on the back of this news and started trading in
the 32 – 38 trading band as there were periodic news of this takeover. This
made it interesting to dig deep into the company.
Some reading up on RHI and the concall
+ presentation for the June 12 quarter mentioned the fact that they were
looking at a acquisition in India and the same would be closed by the end of
the year. Parallely, Orient Refractories also initiated a VRS scheme, expenses
for which were booked in the June 12 quarter. With the resultant time delay the
market lost interest in the stock and stock drifted down to the 29- 30 levels
where the position was built into the counter.
The month of Oct and Nov saw
flurry of activity again as the news of the takeover started surfacing again.
Here’s a link to a new story in the Economic times.
Though there were standard
denials from the company, what is really interesting is the current investor concall
of RHI for Sept 12 - Link. The CFO in the
concall in response to a question explicitly mentions that they are talking to
Orient Refractories and of course a few other players :-). Of course the deal
horizon has got pushed back. The market in the meantime has pushed up the stock
in the 38-40 range.
The market has anchored itself to
the price point mentioned in the ET article of Rs 42 for the deal though I
would be surprised if the deal was to happen at this price point. Factoring in
valuations and precedents on some global deals coupled with control premium my
expectation would be that the deal ( if it takes place :-)) should happen in the
Rs 55-60 price range. It would be a interesting
next couple of months to check if things are heating up.
Disclaimer
1)
The articles that are posted on this blog either stock
specific or otherwise should not be construed as investment advice to buy/ sell
stocks. These are sharing of my thoughts for discussions.
2)
As a analyst and investor I may have positions in
stocks discussed on the blog and may exit these positions without intimation.
3)
Please do not base your buy/sell decision purely based
on the articles in the blog. Do carry out your own diligence before your base
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5 comments:
Nice analysis and thanks for sharing the tracking info.
However I have a question. You seem to imply that the parent co demerged this co to potentially sell it. You also feel that a significant premium to market value will be achieved when the M&A happens. If this is so, why did the promoters let the public hold 51% in this co? Is it because of the 1:1 ratio of demerger? Even so, promoters in India normally extract more value/disproportionate benefit for themselves when demergers happen. What is your take on this?
Hi Anon
I have not implied that the parent did the demerger to sell it. We don't know that yet. That was the thought that crossed my mind and hence became the starting point for digging deep. There is a another company where a similar exercise is underway and that also gets me wondering.
I agree that a lot of promoters would have used the scheme of arrangement not thru the demerger process but thru a amalgamation process by merging in some privately help company at some insane valuation to increase their valuation. Well the promoters havent done that and you will agree I cant be complaining about that :-).
Cheers
Ninad Kunder
Hi Ninad
Excellent analysis. Based on your post, I did my analysis and have posted it here http://www.valuepickr.com/forum/special-situations/601274632. Would love you have your feedback.
Another thing, apart from Tata refractories acquisition by • Krosaki Harima Corporation, I could not locate any other acquisition details. Can you please help with details on other global M&A, if any.
Thanks
Hi Anil
Thanks. Would go thru your post on valuepickr.
There is the Carborundum acquistion of a RHI asset in South Africa RHI Isithebe though i dont think the valuations are in the public domain.
You can check the 2008 acquisition of LWB by Mangnesia which happenned at 8.8 EV / Ebidta.
http://www.mzweb.com.br/magnesita/web/arquivos/MagRef_Apresentacao_Aquisicao_LWB_07set08_Eng.pdf
Cheers
Ninad
I am just amazed at the rate of economic progress in countries like India and china. Western europe and the united states are not yet fully aware of the rapidly changing balance of economic power taking place right now.
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