Any news on BOC India -CMP 165?
Open season Priya Kansara / Mumbai September 3, 2007
Should investors press the sell button when open offers come at a premium to prevailing share prices? A ready reckoner. That the number of open offers has increased in the recent past is not surprising. With high liquidity, robust economic growth and the huge opportunities in the Indian industry, both foreign and domestic investors are keen on acquiring companies in India. According to Sebi data, there were 132 open offers in 2005, 105 open offers in 2006 and 67 offers so far this calendar year. In many cases, the acquiring companies have paid or are paying hefty premiums for buying out target companies. In such a situation the million-rupee question for the shareholder of these companies is whether they should sell out to the acquiring company or hold on to their stake. Analysts advise short-term investors to exit the target company. However, long-term and patient investors may stay invested depending on the fundamentals of the business. But this answer is rather simplistic. The Smart Investor takes a peek at why there is a spate of open offers and what factors investors should consider before pressing the sell button. *Plenty of offers* Open offers have been on the upswing ever since the Indian economic growth story picked up in FY03. There have been open offers in many well-known companies such as ACC, Matrix Laboratories, Shriram Transport, Sesa Goa, Punjab Tractors, i-flex Solutions and Esab India. The recent ones include second such offer from Ambuja Cements and Gokaldas Exports. *WHAT THEY OFFERED?* *Company* *Acquirer* *Open offer price (Rs)* *Closing price# (Rs)* *CMP* (Rs)* *CY2005* 02-Feb United Breweries Scottish & Newcastle 57.50 42.28 294.45 22-Mar ACC Holcim 370.00 356.60 1065.90 31-Mar Crisil Standard & Poor’s 680.00 678.80 3675.00 05-Apr Glaxo Pharma Glaxo, UK 800.00 730.15 1169.60 07-May Adlabs Reliance Capital 183.00 257.40 471.77 16-May Shriram Transport ChrysCapital 35.00 58.65 168.05 19-May Ambuja Cem Eastern Holcim 70.00 69.50 113.35 *CY2006* 02-Jan Thomas Cook Dubai Financial 61.95 58.70 63.40 02-Feb Gujarat Ambuja Holcim 90.64 85.15 133.45 16-Feb Shriram Transport Newbridge 112.75 111.30 168.05 25-Jul Mysore Cements Heidelberg Cement 72.50 49.80 50.80 30-Aug Matrix Labs Mylan Laboratories 306.00 275.00 239.58 10-Nov IL&FS Investsmart E*Trade 210.00 195.20 190.32 *CY2007* 05-Mar MICO Robert Bosch 4600.00 3841.50 4096.00 05-Mar Sesa Goa Vedanta Resources 2036.00 1749.35 1944.00 07-Mar Lanxess ABS Ineos group 201.00 189.65 194.55 21-Mar Geojit Financial BNP Paribas 27.50 35.00 42.02 06-Jun Deccan Aviation Kingfisher Airlines 155.00 135.15 140.47 27-Jun Esab India Esab Holdings 426.00 449.75 495.63 28-Jun Chettinad Cement Promoters 450.00 455.35 441.75 21-Aug Gokaldas Exports Blackstone Group 275.00 252.10 254.03 27-Aug Ambuja Cements Holcim 154.00 133.20 133.45 *Note: The list includes open offers of well-known companies * As on Friday, August 31, # As on the date of announcement of open offer CY: Calendar Year* *Many triggers* The rising number of open offers is primarily due to the surge in high global economic growth and global liquidity leading to easy availability of capital. The low interest rates regime followed by the then US Federal Reserve chairman, Alan Greenspan between 2001 and 2004 led to high liquidity and high economic growth in the US spilling over to other countries as well. Even restricting to domestic conditions, the reasons do not change. India’s GDP has been growing at over 8 per cent for the last few years making corporates richer and helping them achieve scale through organic or inorganic route (leading to higher M&A activity which in turn is the reason for open offers). Further, easy availability of capital with high growth in domestic liquidity scenario have helped companies pursue inorganic plans. Also, the stock markets, which have gone up about five times in the past four years, have made equity capital a cheap source of finance. *Foreign buyers *”Vast opportunities in the Indian market have attracted many foreign players, who have either bought majority stakes in Indian companies or consolidated their holdings further,” says Sandeep Nanda, head-research, Sharekhan. For example, global generics major Mylan acquired Matrix Labs for the latter’s R&D and contract manufacturing facilities in 2006. Oracle had bought banking software player i-flex a year earlier, and has made two open offers so far. Similarly, private equity player Blackstone has acquired 50 per cent in India’s largest apparel manufacturer and exporter Gokaldas Exports. Similarly, Holcim’s consolidated its holdings in cement major, Ambuja Cements due to the phenomenal growth of cement industry in future. *Domestic shopping *Further, better scope for synergies and a move towards consolidation have also prompted Indian companies to look at acquisitions. Vijay Mallya’s full service airline Kingfisher Airlines acquired 26 per cent in low-cost carrier Deccan Aviation in May 2007 for Rs 550 crore and has made an open offer to buy a further 20 per cent at Rs 155 a share, which will open this week. The move was to counter competition and gain synergies in operations in terms of fleet size, crew members, revenue class and rationalisation of costs. *Changing hands *If there is a change in the parent’s ownership pattern, it too triggers an open offer in the Indian arm. The takeover of British gas major, BOC Plc by Linde AG, Germany, triggered an open offer of 20 per cent for the former’s 54.8 per cent Indian subsidiary, BOC India. Similarly, when Mahindra & Mahindra acquired controlling stake in Punjab Tractors and Swaraj Motors from private equity fund Actis, there was an open offer. *Increasing ownership *Besides, some of the managements themselves seek to increase stake through an open offer. Whether it is Bosch increasing its stake in Mico or promoters increasing stake in Chettinad Cements. *What should investors look at?* Typically, after an open offer, target companies are welcomed with their stock prices zooming, closer to the open offer price, which is higher than the prevailing market price. For example, the otherwise laggard stock of Gokaldas Exports jumped 10 per cent on a single day on the announcement of Blackstone’s majority buyout in the company. In case of i-flex, market players had pushed the price higher than the open offer price in the hope that Oracle would increase its price, which it did in 2006. When it comes to taking a decision of whether to hold or sell out, investors should consider factors like target company’s competitive position, growth prospects, industry outlook, premium offered, valuations, the acquirer entity and management control of the target company. Ask the following questions to decide whether to tender the shares or not : *Who is the acquirer? *This is the most important question investors need to address. Buyers could be promoters, competitors, supplier, customer and financial strategic investors like private equity and institutions. So does the opinion change if the buyer changes? The answer is yes. Says Kapil Krishan, chief financial officer, India Infoline, “Open offers by promoters usually indicate an increased commitment to the business. Moreover, if the acquirer is a business entity, it would be able to add more value to the business than a pure financial investor.” In that case, investors would be better invested in the business. “Open offers by private equity players or financial institutions suggest a long term investment and that the company has good potential to perform in future. Moreover, this helps decide the investment horizon,” adds Arpit Agarwal, head-research, Arihant Capital Markets. For example, Blackstone’s stake buyout in Gokaldas signals the long term potential of the beleagured Indian apparel industry and hence only long-term and patient investors are advised to stay invested in the company. An open offer by a competitor also bodes well as this indicates the scope of consolidation and better profitability in the industry due to better pricing power and cost savings due to better synergies. The ideal example is Kingfisher’s acquisition of Deccan Aviation, which has revived hopes of consolidation in the sector. Hence, while Deccan Aviation touched its all-time high of Rs 175 after the announcement, the Jet Airways stock also jumped. Open offers by suppliers or customers indicate better profitability due to cost savings and increase in realisations. For example, UK-based Ineos group took over Lanxess ABS, a market leader in acrylonitrile butadiene styrene and styrene acrylonitrile. The Ineos group manufactures and supplies raw materials to Lanxess. Thus, this buyout will lead to better profitability due to benefits of cost savings and forward integration, which is why analysts advise investors to hold on to their shares. *Any change in the management? *This is the second most important thing to be considered as the growth prospects of the company is decided by the future growth strategies and policies of the acquiring company. In the case of ICI India, the 51 per cent Indian subsidiary of the UK-based parent company ICI, which has been taken over by Akzo Nobel, there will be a change in management. This leads to uncertainty for investors as Akzo Nobel will divest businesses that do not fit with its strategy. However, in the case of Reliance Land and Reliance Capital taking a majority stake in Adlabs, the promoter Manmohan Shetty continues to run the business. Even at Gokaldas Exports, where Blackstone has taken 50 per cent stake, the promoters will continue to run and manage the company. Typically, the control remains with the exsiting promoters when a financial investor takes a majority stake. Generally, the objects of the open offer and the background of the acquirer is mentioned in the open offer announcement document filed with Sebi, which can give some idea of the future prospects of the target company to the investor. If the acquirer has a substantial stake in the target company after open offer, there is a possibility of de-listing of the shares in the future. Says Agarwal, “Most MNCs look at open offers to delist from the bourses and to do away with the various regulatory norms.” For example, companies like Philips and Cadbury have been delisted. *Premium offered *Usually the acquirer pays an attractive premium to elicit a good response from the investors, who will not be too happy to exit if the deal is not sweet. The premium is decided by the growth rate of the industry, the target company’s competitive position and its future growth prospects. For example, given the huge demand for cement in India following increased spending on infrastructure, Holcim is paying Rs 154 a share, which values Ambuja Cements at an enterprise value (EV) per tonne of $268, a premium of 72 per cent to the estimated fair value of $150 according to research by Emkay Shares and Stock Brokers. Also, if the acquiring company is a competitor, then the premium will also be decided by the long term benefits in terms of operational synergies perceived by the acquiring company. There are also cases where the open offer price is increased as the new owners are keen to increase their stake. Oracle had made an open offer at Rs 1,475 in September 2006, which it increased to Rs 2,084 in December. *Conclusion* There is no clear answer to whether you should sell in open offers and in the end, it depends on the business potential and the price. If the new management is more powerful, there are chances that the business will grow more rapidly, but this will benefit long-term investors. If the price is very attractive, and if the open offer is for 20 per cent, there may be more investors tendering their shares, which will result in a lower acceptance ratio. For example, in case of Ambuja Cements, the open offer price is Rs 154, while the market price is Rs 133. If all the non-promoter shareholders tender their shares, the acceptance ratio will be 32 per cent. However, investors can play open offers to their advantage. For example, in the current Ambuja Cement open offer, existing shareholders could sell shares at Rs 154, to the extent of the acceptance. After that, they could buy the shares once again in the market, if they are bullish on the stock. If the promoters are planning to delist the company, there is no reason to be in the stock. Also, investors have to remember that when they tender shares in open offer, the tax liability is higher than what it would be were they to sell on the stock market. If shares are sold on the stock exchange, they will not be taxed if held for over 12 months, and at 10 per cent if held for less than a year. In case of open offer, long-term capital gains will be taxed at the lower of 10 per cent without indexation and 20 per cent with indexation. In open offers, short-term capital gains will be taxed at the individual’s marginal rate of taxation.
On 9/13/07, rajesh khatri wrote: > > Hello, > > Any news on BOC India -CMP 165? > > The stock is up 20% recently. Today it is up 10%. > > Regards. > > Rajesh > > P.S. I hold BOC India @ 136 > > > >
