Breaking (Zee) News - Demerger

There was breaking news of a different variety in Zee news. Zee News went through a scheme of arrangement involving demerger of the General entertainment channels from Zee news and merging them into Zee entertainment.

The shareholders of Zee news as per the arrangement were eligible for 4 shares of Zee entertainment for every 19 shares held in Zee news. They would continue to hold the news business in Zee news.

We tracked the deal from the initial announcement stage and monitored the price movement at every milestone. Find below the various milestones and the cost of creating the residual Zee News

The record date for the transaction was set for 16th April. Arpit had arrived at a fair value for the Zee news share in the Rs 9- 10 bracket.  Post the ex date the market traded the stock in the Rs 18-20 price band and there was clearly returns to be made on the deal.

This however is with the benefit of hindsight. I never invested in this deal as there was clearly time risk involved with no clear timelines on when the court order could come thru. Though I think there was a opportunity just after the court approval came thru. It was a interesting transaction to monitor in terms of price movement at every milestone.

But once in a while it is ok to be a spectator and stay away from the news :-)

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.

Innovative Foods - Money for Nothing, Sequel 2

I had written earlier about a special situation opportunity in Innovative Foods. The link is enclosed below.

http://investingvalues.blogspot.com/2009/11/innovative-foods-money-for-nothing.html

The interesting part in this opportunity arose post the closure of the delisting offer that the promoter made at Rs 34.5. As per SEBI laws a company has to provide the last open offer/ delisting price to all the remaining shareholders post delisting of the company for a period of 6 months.

So you are assured of Rs 34.5 for your holding even if u hadn’t tendered it in the delisting offer. Typically it takes around 45-60 days post the closure of the delisting offer for the actual delisting to take place. It should on the outside take about a month more to tender your shares to the company and get your money.

So the opportunity arose bcos post the closure of the offer, I was able to buy the stock in the market between Rs 31.75 and Rs 33 with a average acquisition cost of Rs 32.05.

It took me about 4 months in the entire transaction. Part of the delay was bcos I went on a vacation and hence missed one of the redemption cycles. But overall it gave me risk free return of about 7.5% in a four month tenure. Might not excite too many ppl but I love risk free return like this.

Britannia - Bonus Debentures

There was a scheme of arrangement in Britannia which involved issuing bonus debentures to shareholders with a face value of Rs 170 and a annual coupon of 8.25% redeemable at the end of 36 months.

I will not get into finer details of this transaction as there is a nice post put out by Prof Bakshi whose link I have enclosed below

http://fundooprofessor.wordpress.com/2010/03/15/britannias-bonds-are-tastier-than-its-cookies/

I had a very small miniscule position in this special situation and the record date for this transaction was March 9th 2010.

Now I come to the interesting part and the reason for this post. The bonds got listed today on the exchanges and lo and behold they got traded as high as Rs 177 on the NSE.

This one completely beats me. The guy who bought it at Rs 177 will make a compounded annualised return of 6.69% on this bond over a three year tenure without factoring in brokerage costs.  HDFC Bank is currently offering 8% for a 3 year fixed deposit. Though one must admit it doesnt offer the thrill of sitting in front of a trading terminal and experiencing the dopamine kicking in.

No wonder they say beauty lies in the eyes of the beholder.

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.

Zenotech Update - Final closure

The case hearing has finally concluded :-). We should hopefully have the judgement within a week bringing to close a long drawn saga. The link to the earlier post is given below

http://investingvalues.blogspot.com/2010/01/zenotech-update.html

From the Supreme Court site

UPON hearing counsel the Court made the following

O R D E R

Mr. F.S.Nariman, learned senior counsel, made his submissions from 10.35 a.m. to 12.40 p.m. Mr.Ashok Desai, learned senior counsel, thereafter, made his submissions for fifteen minutes. Mr.C.A.Sundaram, learned senior counsel, thereafter, advanced his arguments upto 3.05 p.m. Learned Attorney General made his submissions for about fifteen minutes.

Hearing concluded. Judgment reserved.

Liberty to parties to file written submissions within one week.