Midday - Update

I had posted yesterday on the small position that I had created in Midday at Rs 38.2 as part of the merger process. I promptly exited the position today at Rs 40.2. A gain of about 5% in 15 days. Might not sound too exciting for most ppl but I like trades like this. If I can do just 5 -6 trades like this in a year on assigned capital, i would be more than happy. Attaching the payoff matrix. Will continue to track the situation to see how it finally progresses.

Zenotech Labs - Bitter Pill

I had earlier posted on Zenotech Labs laying down the original premise of the trade in a post here.

http://investingvalues.blogspot.com/2009/11/curious-case-of-zenotech-labs.html

After much delay the supreme court judgement came and the court ruled in the favour of Daichhi and the minority shareholders lost the case. The open offer will now happen at Rs 113.6. The stock promptly corrected to the Rs 100 mark where I exited my position taking a loss of about 10-12% on the trade.

A bitter pill to swallow but the downside was factored in the trade in case the judgement came in favour Daiichi.

The stock has subsequently moved down to the Rs 94 level and at some point of time will start becoming attractive considering the high acceptance ratio on the open offer.

Time to attain rationality

I had earlier posted about a trade that was carried out in Britannia industries where the company issued bonus debuntures and the markets mispriced the stock post the record date giving reasonable returns in the time frame that the trade was carried out. The link to the post is enclosed below.

http://investingvalues.blogspot.com/2010/04/britannia-bonus-debentures.html

I had a round of email exchanges with a friend whose bone of contention or query was

How do u that the market will misprice when u initiate the trade? Is it just experience or a element of probability or pure luck?.

I am attaching the email response that I had sent him …

The starting point in a trade like this is to ensure

1) The market risk is very low which is to time the trade very close to the actual event date or the record date.

2) More importantly - valuation comfort. If everything else goes wrong are u still comfortable holding the stock from a valuation standpoint.

Without valuation comfort the trade is a strict No go.

Lets look at the markets are irrational part. True markets do turn irrational at times but i want to inverse that statement. Markets are not rational all the times which is not saying that they are irrational but they take time to reach a level of rationality. I dont know whether I am able to spell out the subtle difference by inversing that statement. The time that market takes to attain that rationality is the time window that a arbitrageur gets for the trade.

So it comes both from experience/ insight and probability. The market has diff kinds of participants day traders, arbitrageurs, tech analysts, long term investors who look individually look at diff information points so at a given point a participant would not have not digested all the news points. For ex If i am buying a stock from a long term objective i might not have look at the technicals ( i anyway dont believe in technicals) and vice versa. So not all participants would have digested a particular corporate action. If it is a bonus or a dividend then most participants would digest it but other corporate actions which have a element of complexity dont get digested as fast.

This is more true in the midcap/ small cap segment which is under researched and uder tracked. If HLL had done a similar exercise i would doubt the arbitrage window would have existed.

 It isnt risk free by any stretch of imagination. Its just about how much risk can u eliminate and dont get into a situation of picking pennies in front of a roadroller.

Trust that could add some value.

Cheers
Ninad

PS: Remembered a interesting exchange from Alice in Wonderland
Alice: But I don't want to go among mad people.
The Cat: Oh, you can't help that. We're all mad here. I'm mad. You're mad.
Alice: How do you know I'm mad?
The Cat: You must be. Or you wouldn't have come here.
Alice: And how do you know that you're mad?
The Cat: To begin with, a dog's not mad. You grant that?
Alice: I suppose so,
The Cat: Well, then, you see, a dog growls when it's angry, and wags its tail when it's pleased. Now I growl when I'm pleased, and wag my tail when I'm angry. Therefore I'm mad.

Innovative Foods - Money for Nothing

I came across this corporate announcement on Innovative Foods.
http://bseindia.com/qresann/news.asp?newsid={4038BCAC-2189-44EE-AD2C-807B2263BE72}&param1=1

Innovative Foods is a Chennai based company which was a BIFR case. Based on the BIFR proceedings the promoters were asked to bring additional capital which resulted in their stake increasing to 93%. According to the BIFR order the promoters has to give a exit option to the remaining shareholders of the company and the company arrived at the exit price of Rs 34.5 to paid to all public shareholder who tender their shares. I have enclosed the link to the offer document.

http://bseindia.com/xml-data/corpfiling/announcement/Innovative_Foods_Ltd_091109.pdf

The offer is open till Nov 19th.
The stock was trading around the 32.15 mark after the announcement date and currently trades around 33.65.

So u can technically buy the stock in the market at this prices and tender at Rs 34.5 and be assured that 100% of you shares will be accepted and money paid to you.

So whats the catch?
Not enough trading volumes and high impact cost so u can deploy very small amounts of capital.

But it is a case of “ Money for Nothing”.

Gwalior Chemicals Update

I had earlier posted on Gwalior Chemicals at this discussing about the opportunity.

http://investingvalues.blogspot.com/2009/06/gwalior-chemicals-special-situation.html

The deal has been consummated with shareholder and regulatory approvals coming through. Except for a amount of 75-100 crores the company has received the balance amount. This amount is currently lying in a escrow account which will be released to the company on achieving some of the deliverables stated in the deal. I at this stage don’t see to much hiccups on this count.

Management had announced a board meeting on the 23rd Sept to discuss the dividend/ share buyback. However the board of directors had to make a unscheduled trip to the US hence the same has got postponed. I last spoke to Sanjeev Pathak the company secretary yesterday and the directors were still not back. According to him the board meeting should ideally happen before the 15th of October.

Gwalior Chemicals - Update

I already written about the Gwalior Chemcials deal with Lanxess and the investment opportunity. As part of the process the company has sent across the notice for the postal ballot. I am enclosing a link to the same.

http://www.bseindia.com/xml-data/corpfiling/announcement/Gwalior_Chemical_Industries_Ltd_240609.pdf

The management has reiterated its decision to distribute Rs 100 crores to the shareholders in this communciation.

To wait or not to wait

In one of my previous post Reverend put across a query to me and i quote

“Your views on Mphasis as a potential delisting candidate? An article I came across suggests that HP has no listed subsidiaries in the 170 countries it operates and makes a case for delisting. They have cited Digital (a subsidiary of Compaq) which they delisted. Happened in 2001 or so.. Your insights please?”.

It’s a interesting question and I understand the thought process that goes behind this opportunity. I have also in the past and continue to analyse similar companies.

Lets examine the structure of evaluating such a opportunity.

Mphasis was acquired by EDS which subsequently got acquired by HP globally. HP globally doesn’t have listed subsidiaries and at some point of time would probably go in for a delisting exercise for Mphasis.

The logic is fair and there is strong likelihood of this happening. The important question is when? Next month, Next year or 5 years down the line.

This is a huge uncertainty that one has to live with. Mphasis currently quotes at about 393. In the intermittent period till the delisting happens what level could the stock go down to. This is absolutely critical which leads us to the next stage.

Would I buy Mphasis without factoring in a delisting opportunity? Am I comfortable with financials, performance, industry outlook etc of Mphasis? Is there a margin of safety in the stock without the delisting?

If the answer to these questions is yes? Then it makes sense to look at the opportunity. If intrinsically one is comfortable to hold Mphasis then a possible delisting is a added bonus.

Else one needs to factor in the possible downside in the stock, the likely timeline for a corporate action and the opportunity cost with respect to the general market.

I hold a stock where there is similar logic waiting to play out. Will write on it in my subsequent posts.

On a side note Reverend, I wouldn’t see a straight delisiting exercise in Mphasis. EDS currently holds about 60%. If they were to do this I would expect them to do it 2 stages. Phase 1 do a open offer and increase their stake to either 75% or 90% based on the listing requirements and then in Phase 2 actually go thru the delisting process.

Remembered a old Rafi and Asha song on this ….
ham intezaar karenge
ham intezaar karenge tera qayaamat tak
khudaa kare ke qayaamat ho, aur tu aaye
ham intezaar karenge …

IL&FS Investmart - Bingo :-)

I had earlier posted here on a special situation transaction covering IL&FS Investsmart and Dabur Pharma. I had just few days back put in a update on the status of this special situation transaction.

IL&FS Investsmart today came out with a announcement that its promoters HSBC are seeking to go in for a delisting :-) Whoopie. The link is enclosed here.

Atleast one leg of the transaction paid off and will hopefully deliver some good bottomline. Lets see how the market reacts to the news tomorrow. I expect the delisting to happen anywhere in the Rs 200 to Rs 250 band. The original price of the transaction was around Rs 84. Will come back with more updates on this as and when the transaction moves forward.

Gwalior Chemicals - Economic Times Update

I had posted earlier thru the week on a special situations case arising in the Gwalior Chemicals stock. The economic times today put out a article on similar lines and I am enclosing the link here to the article.

I am reassured that I haven’t got the numbers wrong or have missed something in my analysis because the economic times argument and numbers are in sync with what I put out in my post.

It of course is now upto the market how they want to value cash especially one which is coming tax free in the hand as opposed to letting it lie in the bush.

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.

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.

Andhra Cement

This week there was a news report in the economic times talking about how MNC cement companies like Lafarge, CRH, Italicement have envisaged interest in taking over Andhra Cements which is part of the Duncan Goenka Group.

The ET also speculated that the buyout could happen around the Rs 75 mark looking at historical M& A benchmarks in the industry. The stock promptly closed the day up 20% on the circuit at Rs 18.72. The stock has been moving circuit to circuit and closed at 24.70 yesterday.

I unfortunately haven't been on this gravy train :-) and I don’t see how I will get on as a I think the stock would continue moving up on the circuit till maybe the Rs 50 mark.

So what is it that interests me in the stock?

The current promoter holding is about 73.19% and of the remaining 26.81% the holding pattern has

IDFC - 6.6%
Fidelity - 5.58%
HDFC - 4.53%
Total - 16.70%

There is very less public shareholding in the stock. Once the dust settles down post the deal announcement and based on where the price settles down there could be a arbitrage opportunity playing out during the open offer and a potential delisting play.

Mather & Platt Delisting - Offer Acceptance

I had written earlier here about the delisting opportunity in Mather & Platt. The company through its announcement has accepted the discovered price of Rs 250 for delisting. I had expected the acceptance price to be in the 200-220 mark but it has turned out to be more attractive.

All shareholders who tendered in the open offer will get paid Rs 250 per share for shares tendered. For shareholders who have not tendered shares they can do the same post delisting which might take about 2 months. The share price for Mather has subsequently moved above the 240 mark filling in the potential arbitrage opportunity.

I have exited my remaining positions by tendering in the open offer.

Tata Steel CCPS - Better bet

Tata Steel issued 547,251,605 2% Convertible Cumulative Preference Shares (CCPS) of Rs. 100 each at an issue price of Rs. 100 each aggregating to Rs. 5,473 crores in Sept 07. As per the terms of the issue, six CCPS of Rs.100 each are compulsorily and automatically convertible on 1st September, 2009,into one Ordinary Share of Rs. 10 each, at a premium of Rs. 590 per share

Since it is a preference issue the preference shareholder has a higher right to the dividend than the equity shareholder. So unlikely that Tata Steel will skip dividend on the CCPS. The outflow is about 110 crores in terms of dividend.

A lot of water has flown below the bridge since then and the CCPS is currently trading around the Rs 23-24 mark. The Tata Steel stock has got hammered down in the current downturn with steel prices on a downward spiral.

I have listed down possible scenarios in terms of the Tata Steel stock price a year down the line. Looked at 5 possibilities, price remaining same, +10%, +20%, -10% & 20%. So if we buy 6 CCPS and multiples thereof I have listed down the cashflows out of the trade and the payoff in terms of return ( IRR)

Mather & Platt Pumps - Delisting Play

Last month amidst the chaos that was playing out, I came across a announcement on the BSE (18th of October) about the outcome of the EGM conducted at Mather & Platt Pumps.

Mather & Platt Pumps is owned by Wilo which is a German company.

Details of the EGM is linked here and it gave a go ahead to the management to explore potential delisting of the company. The stock was hovering around the Rs 146 mark and I bought some stock. The company announced its delisting offer on the 23rd of October. I have enclosed the link here. Was caught up in work so didnt focus too much on it.

Surprisingly in the panic the stock still didn’t move. I managed to pick some additional stock at Rs 149 on the 27th of October. So the information was available in the public domain for over a week and the stock refused to move at all.

It started moving subsequently and I exited some of my positions today around the Rs 200 mark. My estimate is that the bookbuilding will throw up a price around the 200 – 220 mark. Not waiting to catch the top and also it is more tax efficient to exit through the stock exchanges.

Dabur Pharma & IL&FS Investmart - Two to Tango - Arbitrage Bet

I had written earlier on the potential arbitrage opportunity in Dabur Pharma and here on how it almost didn’t play out. The arbitrage has become far more attractive now.

Dabur Pharma
A quick recap. Dabur Pharma was acquired by Fresenius and it made a open offer at Rs 76.50 and acquired the mandatory 20% in the open offer. Fresenius’s stake post the open offer is 90.89% in the company.

IL& FS Investmart
IL&FS Investmart was sold off by Etrade to HSBC which wanted to expand its securities business in India. HSBC also made the mandatory 20% open offer at Rs 200. Its stake post the open offer in ILFS Investmart is 93.86%.

So what is the bet?

In both the cases the public shareholding has fallen below 10% post the open offer and according to SEBI both the companies have to either delist or the respective promoters have to offload their stake to bring it down below 90%.

In the event of the company delisting then as per SEBI rules the last open offer price has to be offered to the remaining shareholders to exit for a period of 6 months after delisting.

What are the potential payoffs?

Dabur Pharma
Current Price – 38.5
Exit Price - 76.5
Delisting Return - 98%
Potential Downside - 20%

ILFS 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%

Disclaimer - I have a position in both the stocks and kindly do u r own due diligence before taking a decision.

Arbitrage that went right - ICICI PRU FMP Series 36 Plan A – Growth

I had in my earlier post written about an arbitrage that didn’t work out ( Dabur Pharma) as I had thought it through. Listing down one that did go right.

Arbitrage opportunities tend to get thrown up around panic selloffs. Around the third week of Jan markets corrected significantly from the highs of the 20,000 peak to around the 16500 – 17500 range.

I encountered this arbitrage opportunity around that time. ICICI Pru had a Fixed Maturity Plan listed on the BSE with a 18 month tenure. The tenure for the plan comes to a closure in the month of November 08. It was a pure play debt product with no exposure to the equity markets and would give a annualised return of 8-9% for investors like most FMP’s would.

It had a NAV of around 10.6 at that time and it was trading in the 9.22-9.23 range on the BSE. It was clearly additional return available at virtually no risk. Though it is relatively illiquid managed to buy some position in it.

I exited my position last week in the 11.02-11.03 range managing a absolute return of 19% and annualised return of 25% post brokerage. The NAV has gone up to Rs11.2 but I choose to exit early and not wait for redemption to avoid higher taxation rates. The markets in the meantime have gone down by about 14% in the same time frame.

The importance in such a transaction is to have patience and be comfortable with seeing NAV rise at a supersonic speed of Rs 0.02 every week :-) and wait for the gap between the market price and intrinsic value narrowing down.

It doesn’t appear “sexy and hot” as the next potential ten bagger but I like opportunities like these.

Arbitrage Trade Gone Wrong ( Almost) - Dabur Pharma

I spotted a potential arbitrage opportunity last month in Dabur Pharma and invested on that basis. Let me list down the chain of events.

1) Dabur Pharma got acquired by Fresenius as the Burman’s exited the business. Fresenius made a open offer for the stock at Rs 76.5 per share.
2) The open offer opened in June 20th and ended on July 09th
3) Fresenius before the open offer by way of share purchase agreement bought 73.27% stake in the company.
4) 25th July - The post open offer status was communicated to the exchanges. The company had managed to garner 17.62% shares in the open offer and had increased its holding to 90.89%.
5) The stock ended 25th July at around Rs 61.50 which was a Friday and the announcement was done post market hours.

Investment Rationale

Having garnered 90.89% stake, as per SEBI norms the company would have to delist its shares as the public shareholding was less than 10%. There were two possible possibilities here

1) Option 1 - Fresenius choses to delist Dabur Pharma in which case the remaining shareholders have to be provided a exit at the last open offer price of Rs 76.50. This was a clean 24% return on investment in a 2-3 month horizon.

2) Option 2 - Fresenius choses not to delist Dabur Pharma in which case it would have to sell its stake so as to bring it below 90%.

I betted that Option 1 is what Fresenius would go with. While putting together the initial share purchase agreement Fresenius assiduously went about acquiring shares from all possible significant shareholding group and not just the promoters. It acquired stake from IFC ( International Finance Corporation) and also acquired all ESOP’s that were issued to employees something that it didn’t have to go about doing.

Also Fresinius already had a 100% subsidiary in India called Fresenius Kabi India Pvt Ltd so it made logical sense to go that route.

I bought the stock on Monday / Tuesday in the price range of Rs 61.50 – Rs 62.5.

Events post that

1) 11th August - The erstwhile board of directors along with the CEO resigned and a new board was elected driven by Fresenius
2) 11th August - The new board on the same day acknowledged receipt of a proposal from Fresenius Kabi AG to jointly develop business, increase operational efficiencies and provide access to markets for products manufactured by Dabur Pharma.
3) On the same day in a press conference in Delhi Rainer Baule the CEO of Fresenius Kabi stated that Fresenius will invest 30 million Euros in Dabur Pharma to double capacity. He also said that the company will sell 1% of its stake to a strategic investor to keep Dabur Pharma listed.

There went my arbitrage trade though there is still no official announcement on this. Luckily the stock went up post this announcement and currently hovers around the Rs 68 -69 mark. I have a 1 month compliance issue before I can sell the stock and intend to sell post that.

Though the fundamental story might be good and the stock could potentially go higher but that is a independent assessment. I wouldn’t want to rationalise a arbitrage call into a fundamental call because the arbitrage story might not play out.