Midday / Nirma Update

Midday

I had initially written about the midday demerger opportunity and followed it up with a subsequent post when I exited the trade. Links to the post are enclosed below

1) http://investingvalues.blogspot.com/2011/01/take-midday-break.html

2) http://investingvalues.blogspot.com/2011/01/midday-update.html

The stock went Ex on the 20th and the market finally valued the radio business at Rs 8.60 per share on the closing of the day. This was in sync with my estimates of Rs 8-10 per share with 10 bucks on the outside.

Nirma

I had written earlier on the Nirma Delisting opportunity and the structure of the transaction. Link of the post is enclosed below

http://investingvalues.blogspot.com/2011/01/nirma-delisting.html

The reverse bookbuilding closed and the company has garnered enough shares to make the delisting successful at a price of Rs260. The management has till Feb 02nd to announce its acceptance / rejection of this discovered price.

There is a side trade that can be done now that the book has closed. Typically in the event of the management accepting the price, the stock will move towards the Rs 255 mark with the arbitrageurs sealing the gap. At the current price of Rs 248 there is Rs 6-7 bucks on the table in a 10 day period. However in case the management decides otherwise and rejects the offer then the stock could settle 25% lower from here. To quote Buffett/Munger this is the classic “Picking pennies in front of the roadroller” :-) and I for sure don’t have the appetite for it.

Nirma - Delisting

The promoters of Nirma in their announcement on 11th of October stated their intent to take the company private and de-list it form the exchanges. I have in the past invested in multiple delisting opportunities and had also put out a guest post on my friend Rohit blog detailing out the framework that we follow while evaluating a delisting opportunity. The link to that post is here
Using that framework let me quickly run thru the thought process in evaluating this special situation opportunity. In any delisting opportunity and the same framework can broadly be applied across other special opportunities, there are 3 risk points in the transaction


1) Time Risk
2) Price Risk
3) Deal Risk

Let me address each of these risks with respect to the Nirma opportunity.
1) Time Risk - The entry point for the transaction was timed post the shareholder approval. Post which filing is done with the exchanges. By monitoring various milestones in the deal, Time risk was constantly tracked.
2) Deal Risk – The promoters owned 77% stake in the company. For the reverse bookbuilding to succeed the promoters had to garner atleast 13% in the process.
Analysis of the shareholding structure indicated that institutions held about 2.56% shares and 42 individuals owned about 14.97% shares in the company. Clearly the company had to manage these shareholder to ensure that the delisting takes place.
3) Price Risk - This is where the opportunity really opened up. The promoters in their communication indicated Rs 235 as the fair prices for the delisting process. This effectively set the floor for the delisting.

Transaction Details
As stated earlier the floor price on the transaction was effectively set at Rs 235 as the promoters had indicated that they were comfortable with this price. I entered the trade around the last week of November in the price range of Rs 222 - 225. Surprisingly inspite of the Rs 235 floor set, the market was effectively paying me option money to take up this position.

The reverse bookbuilding started on the 17th of Jan and is on till the 20th which is tomorrow. I exited the position today in the range of Rs 245-247 on the exchanges. The trade gave me a return of 10% on capital in a span of 2 months.

There could be more return on the table as the book appears to be closing in the 250 -260 range but I m comfortable taking my money home without having to live thru the risk.

HSBC Investdirect - Exit

This one worked out better than I expected. I had earlier posted on the delisting opportunity of HSBC Investdirect. The link is enclosed below

http://investingvalues.blogspot.com/2010/04/hsbc-investdirect-delisting.html

As the book opened for delisting the initial bids came at the Rs 350 mark. The markets promptly anchored to this price and the stock ran up from the 300 band to a high of 335 yesterday. I promptly exited my position at a average rate of Rs 328 without waiting to find the delisting price. Afterall there is a huge risk that the 2 large players Mathews and Deutsche could tender it at a price lower than 350. This was better than my initial expectation of delisting in the 315-325 mark.

This transaction delivered me a return of 41% on my original investment in a 3&½ month period and about 16% on the second tranche of my investment in a months time.

Off to searching newer opportunities which are becoming very scarce with the run up in stock prices.

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.

http://investingvalues.blogspot.com/2008/11/dabur-pharma-il-investmart-two-to-tango.html

2) Subsequent posts when the delisting got announced and my exit

a) http://investingvalues.blogspot.com/2009/06/il-investmart-bingo.html

b) http://investingvalues.blogspot.com/2009/10/long-hiatus.html

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.

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

http://valueinvestorindia.blogspot.com/2010/02/special-opportunity-framework.html

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.

Delisting - Interesting Play

I have been involved in multiple delisting opportunities where I work closely with my friends Rohit Chauhan and Arpit Ranka.


Rohit had written on his blog about one of the delisting opportunities that we had analysed and were involved together. The company involved was Elantas Beck. The link to it is attached here

First post
http://valueinvestorindia.blogspot.com/2010/01/arbitrage-case-study-elantas-beck.html

Follow up post
http://valueinvestorindia.blogspot.com/2010/01/clarifications-on-previous-post.html

I had subsequently written a guest post on Rohit’s blog talking about the framework that is employed by us to look at evaluating delisting and other special situation opportunities. The link to that post is attached below.
http://valueinvestorindia.blogspot.com/2010/02/special-opportunity-framework.html

Subsequent to these posts we also analysed / invested in the delisting of Micro Inks and I plan to put out a separate post on how this particular opportunity was evaluated and the returns it generated.

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.

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.

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.