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The gross profits appear quite small individually in a special situation, but in aggregate

Ashish Kila
Perfect Research


Our Chairman - Mr. R.A. Kila



Perfect Research Team


““Workouts” – these are the securities with a timetable. They arise from
corporate activity – sell-outs, mergers, reorg...


In the broader sense, a special situation is one in which a particular
development is counted upon to yield a satisfact...


De-listing.



De-merger.



Mergers and Acquisitions.



Tender Offers.



Bankruptcy Proceedings.



Spinoff.
Delisting
De-merger
Open Offer

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
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



Huge investments possible normally due to good liquidity.
Well defined tim...


Open Offer :- Introduction



Checklist of Open Offer.



Using Open Offer to create cheap shares
Examples from our I...


An open offer is an offer from either the promoters or a big
investor to buy shares from the open market at a fixed pri...


Friendly Takeover.



For Raising Stake.



Hostile Takeover.
OPEN OFFER
REQUIREMENT:
 SEBI Takeover Regulations 2011 - Shareholding
Thresholds:-
Source:Financial Express,Business Standard
-For special situation opportunities we go through BSE website’s corporate
announcement section.
-Also most of these annou...
Public Announcement

Whole process takes approx 3 months . Delay could happen at SEBI level for giving its
comments on DLO...


There are some risks involved into open offer cases:

1.Deal Risk: There are always some risk from regulatory side that...
Exceptional Case…??
SEBI Se Panga..!!


In October,2011Marg Ltd made an voluntary open offer to acquire the
20% fully diluted voting capital at Rs.91 per share...




Acquirer background and financial strength would have raised
flags for the Marg case
Also an additional check could ...
Keeping Tab of Timelines
-For tracking open offer detail,we go through SEBI website.
Keeping Tab of Approvals
For checking the status of approval, we go through FIPB website.
For checking the status of approval, we go through CCI website.


An open offer for acquiring shares once made shall not be withdrawn
except under any of the following circumstances—

A...


In July,2005 Nirma Industries ltd. made a mandatory Open offer for acquisition of
Shares Shreerama multitech ltd.



A...


Voluntary open offer is a statement of the confidence promoter have in
the future potential of the company and the valu...


Decision on selling or holding on to your shares should be based on a
methodical assessment of the post-takeover scenar...


We see every “Open Offer” from two perspectives:

(1) Value

investing Perspective

(2) Short

Term Perspective- Arbitr...


Share sale in an open offer is like any other equity transaction but since
there is no securities transaction tax (STT)...


Open Offer :- Introduction



Checklist of Open Offer.



Open offer: Value opportunities with corporate actions as t...


The Company provides a wide range of special refractories and monolithics to meet
the needs of the iron and steel indus...








Refractories are non-metallic heat resistance materials that constitutes
the lining for high-temperature furna...
Source:rhi-ag.com










The Indian Refractory industry is estimated to grow at 10-12 per cent
annually.
The refractory industry is ...
Source:status and outlook of indian
refractory industry,B.V.Raja,IRMA
Particular
Revenue
Revenue growth(YoY)
EBIT
EBITM
Capital Employed
ROCE*

201303
361
20.33%
65
17.89%
105
61.74%

201203
3...
 Peer Group Comparison(Standalone):

Year End
Net Sales
PATM(%)
ROCE(%)
ROE(%)
P/E(x)*
P/B(x)*

Orient Refractories Vesuv...
>Refractories:
73% of total revenue for year ended march 2012 came from it's refractory business.

Particular

201203

201...
70

64.58

60

57.57

50
40

61.74

59.84
46.36

36.56

EBITM

30
21.37

20
10

ROCE

15.04

20.98

17.24

16.57

17.89

0...
70.00%

61.74%

60.00%
50.00%
40.00%

40.43%
ROE

30.00%

ROCE

23.12%

20.00%

16.24%

14.63%
12.46%

Vesuvius India

IFG...
 Orient




Refractories:-

Acquired by $1.29 billion German Major RHI Group, globally operating
supplier of high grad...













The RHI Group sets ambitious goals for 2020: Revenues of EUR 3 billion
and an EBIT margin of ≥12%!
In...








.

ORL is a strategic fit as it strengthens market position in a high growth market
(difficult to access from ...


The RHI Group has pursued a clearly defined strategy for many years,
which is based on expanding market presence in the...


India has emerged as the fourth largest steel producing nation in the
world, as per the figures release by World Steel ...
Source:RHI-AG
Current Market Price
Offer Price
Profit Expectation
Cost Of Execution
Return Expectation

37.5
43
5.5

Acquirer's Name
Sha...
Source:BSE India
Source:BSE India


Retail Shareholders:- As seen in Open Offer that all retail
shareholders are generally not aware/take effort to tender ...


With 70% acceptance ratio , the price for the residual shares drops to Rs
25 against the market price of Rs.39 before o...
Source:nseindia.com,prices are taken
on closing basis.


Open Offer :- Introduction



Checklist of Open Offer.



Using Open Offer to create cheap shares
Examples from our I...


Shanthi Gears Ltd (SGL) was established in 1972.



It’s product portfolio encompasses a range of customized gear boxe...
Acquirer's Name
Shares to be acquired(Offer size)
Acquirer's stake before open offer
Acquirer's stake after open offer

Tu...
Particulars
Tube Investment Ltd.
Preferential Allotment
Conversion of GDR
Total of the above
parties to agreement
Promoter...
Assume Tender from various categories of Shareholders:Best
70%
30%
80%
75%

Probable
80%
45%
80%
80%

Shares Likely to be ...


TI is in the industrial chain business, which caters to power transmission
business. Gearbox also forms a part of indus...
 Investment Thesis: Value Investor Perspective


Our actual cost was Rs 31 per share( against offer price of Rs 81) so w...
Note:- Remaining Market Share Exit Price is taken on the basis of market price of
Share before the open offer announcement...


Market price of the Share few months before the open offer
announcement.



Fundamentals of Companies on the basis of ...


In our calculation for exit price of remaining shares of Shanthi Gears Ltd.
after closure of Open offer is estimated on...
Company came up with an open offer on 13th July, 2012. We entered one week
after the announcement @ price of Rs 68 .
Open ...


Open Offer :- Introduction



Checklist of Open Offer.



Using Open Offer to create cheap shares
Examples from our I...


Liberty Phosphate Ltd. took birth in 1976 and carried out expansion time
to time to enhance its capacity to cope up wit...


Coromandel International Limited :-

One of the largest companies within the Murugappa Group, Coromandel
International,...
 Acceptance Ratio & Profit Calculation Analysis:
Assume Tender from various categories of Shareholders:Best
70%
30%
80%
7...
 Short Term Play in Open Offer:

The Share was trading at Rs.210 after the announcement of open offer at
Rs.241, the gap...


In our calculation for exit price of remaining shares of Liberty Phosphate
after the closure of Open offer is estimated...


As per our calculation the exit price was around Rs.130 but after the open
offer closed, the Share price came down to R...


Open Offer :- Introduction



Checklist of Open Offer.



Using Open Offer to create cheap shares
Examples from our I...


Highly Liquid :- HUL, Crisil Ltd.



Illiquid :- Gujarat Auto Ltd.


At the time of HUL Open offer, the Share was highly traded and also
available in Future Segment .



Just before the o...
 Acceptance Ratio & Value of Remaining Shares
Analysis:Assume Tender from various categories of Shareholders:Best
Non Pro...
1. Generally, Investors do not tender their shares in open offer if they have
invested with long term perspective.
2. Inve...


Like HUL, Crisil Ltd also belongs to a liquid category stock. At the time of
open offer the share was highly traded.

...
 Acceptance Ratio & Value of Remaining Shares Analysis:Assume Tender from various categories of Shareholders:Best
70%
30%...


In Gujarat Auto Promoters Holding was 70.62% and acquirer acquired
55% from promoters and hence had to come up with an ...
Assume Tender from various categories of Shareholders:Non Promoter Corporate
Retail public
Total institutions
Total foreig...


If really there was a return of around 10% within just 2.5 month, then
there is an obvious question to be asked.

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Wh...
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Merely the presence of Mutual funds/Institutions is not enough. Because
if they see the open offer as an “ exit opportu...



ShareholdingIf Mutual Funds/Institutional investors have significant holding( like in HUL
30% and Crisil ltd. 26.5%) ...


Hexaware is India's ninth largest IT exporter with annualized revenue of
Rs 912 crore in FY12. The company is also sitt...
Are they buying from open market route..??


In Hexaware Technologies Ltd. the acquirer after announcement of open
offer ...
Please feel free to contact me with any unanswered questions,
suggestions & ideas.

 ashishkila@gmail.com
 +91-999975132...
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Open Offers

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Open Offers one of the special situations, is hereby explored in detail to understand how we can make money as an arbitrageur as well as an investor

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Open Offers

  1. 1. The gross profits appear quite small individually in a special situation, but in aggregate Ashish Kila Perfect Research
  2. 2.  Our Chairman - Mr. R.A. Kila  Perfect Research Team
  3. 3.  ““Workouts” – these are the securities with a timetable. They arise from corporate activity – sell-outs, mergers, reorganizations, spin-offs, etc. In this category we are not talking about rumors or “inside information” pertaining to such developments, but to publicly announced activities of this sort. We wait until we can read it in the paper.”  The gross profits in many workouts appear quite small. It’s a little like looking for parking meters with some time left on them. However, the predictability coupled with a short holding period produces quite decent average annual rates of return after allowance for the occasional substantial loss. --Warren Buffett
  4. 4.  In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance. In the narrow sense, you do not have a real “special situation” unless the particular development is already under way. -- Benjamin Graham  “Something out of the ordinary course of business is taking place that creates an investment opportunity. The list of corporate events that can result in big profits for you runs the gamut — spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions.” -- Joel Greenblatt
  5. 5.  De-listing.  De-merger.  Mergers and Acquisitions.  Tender Offers.  Bankruptcy Proceedings.  Spinoff.
  6. 6. Delisting De-merger Open Offer        Huge investments possible normally due to good liquidity. Well defined timelines. Very low failure rate vis-à-vis delisting etc. Risk of withdrawal by promoter absent. Calculated risk is fairly low as compared to others. Decent number of such opportunities available throughout the year. Lastly, we can use this corporate event as an opportunity to create cheap shares…
  7. 7.  Open Offer :- Introduction  Checklist of Open Offer.  Using Open Offer to create cheap shares Examples from our Investment History:1.Orient Refractories. 2.Shanthi Gears. 3.Liberty Phosphate.  Highly Liquid Vs Illiquid Open Offers Examples:- HUL , Crisil and Gujarat Auto. 7
  8. 8.  An open offer is an offer from either the promoters or a big investor to buy shares from the open market at a fixed price.  Most open offers come at a premium to market price.  Offers could be voluntary or compulsory.
  9. 9.  Friendly Takeover.  For Raising Stake.  Hostile Takeover.
  10. 10. OPEN OFFER REQUIREMENT:
  11. 11.  SEBI Takeover Regulations 2011 - Shareholding Thresholds:-
  12. 12. Source:Financial Express,Business Standard
  13. 13. -For special situation opportunities we go through BSE website’s corporate announcement section. -Also most of these announcements come in Financial Express Newspaper.
  14. 14. Public Announcement Whole process takes approx 3 months . Delay could happen at SEBI level for giving its comments on DLOF and subsequently seeking questionnaire from merchant banker.
  15. 15.  There are some risks involved into open offer cases: 1.Deal Risk: There are always some risk from regulatory side that the deal may not get through eventually. Acquirer's profile also plays an important role in shaping the final outcome of the deal. 2.Time Risk: Clearance from various regulators (SEBI, RBI,CCI,FIPB etc.) is required for the deal to get through. It may take some considerable time in getting the final approval especially in the case where the acquiring promoter does not have a clean track of public market activities and there are some controversial clauses embedded into the deal agreement. Note: Interest on delay: If there is delay from acquirer side to reply SEBI queries, then the interest @10% is paid to the shareholder for delayed period(As in case of Wintac)
  16. 16. Exceptional Case…?? SEBI Se Panga..!!
  17. 17.  In October,2011Marg Ltd made an voluntary open offer to acquire the 20% fully diluted voting capital at Rs.91 per share.  Due to previous takeover violation by promoter SEBI asked the promoter to revise the offer price to Rs.216 per share .  Promoters of Marg ltd. moves to SAT against SEBI order and pray for withdraw of open offer because of delayed reply from SEBI site.  SAT allowed to withdraw open offer .  Now SEBI moved to Supreme court against SAT Order. Link Link
  18. 18.   Acquirer background and financial strength would have raised flags for the Marg case Also an additional check could be that unless an open offer given by existing promoters is by large Indian/MNC corporate, we should prefer a) Change of Control Transaction Because existing promoters are price sensitive (like Marg) as they already have control over the company whereas any new acquirer will only get control after the deal goes through. So new acquirer will pursue the deal more vigorously
  19. 19. Keeping Tab of Timelines
  20. 20. -For tracking open offer detail,we go through SEBI website.
  21. 21. Keeping Tab of Approvals
  22. 22. For checking the status of approval, we go through FIPB website.
  23. 23. For checking the status of approval, we go through CCI website.
  24. 24.  An open offer for acquiring shares once made shall not be withdrawn except under any of the following circumstances— A. Statutory approvals disclosed in the detailed public statement having been finally refused. B. The acquirer, being a natural person, has died. C. Any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer. D. Such circumstances as in the opinion of the Board(SEBI), merit withdrawal.
  25. 25.  In July,2005 Nirma Industries ltd. made a mandatory Open offer for acquisition of Shares Shreerama multitech ltd.  After announcement acquirer found some discrepancies in financial accounts of shreerama multitech on the basis of that Nirma filled withdrawal application to SEBI focusing Regulation 27 (1) d of the Takeover Code which allowed the withdrawal of the offer under ” such circumstances as in the opinion of the Board merit withdrawal”.  SEBI Disallowed the Same.  After that Nirma Moves to SAT against SEBI order and In June,2008 SAT also Dismissed the same  After that Nirma Moves to Supreme Court against SEBI order and In May,2013 Supreme Court also Dismissed the same and Pass an order to instruct the Nirma Industries ltd to proceed with Open offer and follow regulation.
  26. 26.  Voluntary open offer is a statement of the confidence promoter have in the future potential of the company and the value it is likely to bring to the table.  if investors give in their shares, on the one hand they earn a reasonable premium over the existing stock prices, but on the other hand, they also lose out on future earnings if the company does well. And if you decide not to surrender your shares, the reverse holds true.
  27. 27.  Decision on selling or holding on to your shares should be based on a methodical assessment of the post-takeover scenario.  Decision should be based on the assessment of the future prospects of the acquired entity. "Assuming that the open offer is coming from a strong acquirer who has solid plans for the company, investors could hold on. At most times, such acquirers add value to the company." M. Sundararajan, VP & Group Head (M&A and Advisory), SBI Capital Markets   Investors should look at open offers in the same way they would look at any other stock from the sell or hold angle. "If an investor sees long-term potential in a company, then he should hold on, or else surrender. Rakesh Jhunjhunwala Source: Business Today
  28. 28.  We see every “Open Offer” from two perspectives: (1) Value investing Perspective (2) Short Term Perspective- Arbitrage
  29. 29.  Share sale in an open offer is like any other equity transaction but since there is no securities transaction tax (STT) on it, the concessional tax rate of Short Term & Long Term Capital gains is not available Tax Regulations for Open Offer Transaction Long Term Capital Gains-This transaction is not exempted from long-term capital gains tax. Hence, the gains are taxed at 10% without indexation or 20% with indexation, whichever is lower.  Short Term Capital Gains- The capital gains will be added to investor’s income and taxed according to the tax bracket he falls under. Source:www.Business Standard
  30. 30.  Open Offer :- Introduction  Checklist of Open Offer.  Open offer: Value opportunities with corporate actions as triggered Examples from our Investment History:- 1.Orient Refractories 2.Shanthi Gears 3.Liberty Phosphate.  Highly Liquid Vs Illiquid Open Offers Examples:- HUL , Crisil and Gujarat Auto. 35
  31. 31.  The Company provides a wide range of special refractories and monolithics to meet the needs of the iron and steel industry.  ORL customers include large domestic integrated steel producers and mini steel plants that includes Steel Authority of India, Mukund Steel, Tata Iron and Steel Company, RINL – Vizag, Sunflag Iron, Lloyd Steel, Usha Martin and the Jindal Group.  RHI, which is one of the largest refractory companies in the world acquired around 43.6% shares from the promoters and made a public offer of around 26% as per SEBI guidelines  The agreement was entered at Rs 43 per share and the public offer for 26% was also made at the same price. Source:Orientrefractories.com
  32. 32.     Refractories are non-metallic heat resistance materials that constitutes the lining for high-temperature furnaces and reactors and other processing units. Refractory products fall into two categories:brick or fired shape and specialities or monolithic refractories. Brick or fired shaped refractories: Monolithic refractory is the name generally given to all unshaped refractory products. It comes in various types: Castables, Plastic,Ramming,Patching,Coating, Refractory mortars, Insulating castables: Source:CERAM Research Ltd.
  33. 33. Source:rhi-ag.com
  34. 34.      The Indian Refractory industry is estimated to grow at 10-12 per cent annually. The refractory industry is fragmented with more than 150 players, of which,15 to 16 are major players. Production Capacity of refractories in India is estimated with 2.5 million tons(MT). The top four manufacturers account for more than 50% of the total production volume. India contributes to 4.5% of the world production of refractory materials. Raw Raw material material Raw material source Refractory Refractory manufacturer manufacturer Steel/ other Steel/ other industries industries Value added Refractories Premium steel/lower Source:researchmarket.com, specific cos. Business line
  35. 35. Source:status and outlook of indian refractory industry,B.V.Raja,IRMA
  36. 36. Particular Revenue Revenue growth(YoY) EBIT EBITM Capital Employed ROCE* 201303 361 20.33% 65 17.89% 105 61.74% 201203 300 12.36% 50 16.57% 77 64.58% 201103 267 22.48% 46 17.24% 99 46.36% 201003 218 3.81% 47 21.37% 78 59.84% 200903 210 23.53% 44 20.98% 77 57.57% 200803 170 19.72% 26 15.04% 70 36.56% *Segment asset given in balance sheet is used as a proxy to capital employed.Source:Orientabrasives.com,bseindia.com
  37. 37.  Peer Group Comparison(Standalone): Year End Net Sales PATM(%) ROCE(%) ROE(%) P/E(x)* P/B(x)* Orient Refractories Vesuvius India IFGL Refractories 201303 201212 201303 361 564 307 11.48% 9.89% 5.56% 61.74% 23.12% 14.63% 40.43% 16.24% 12.46% 11.19 12.69 7.96 6.01 2.06 1.08 Based on FY'13 annual results. Based on standalone nos.as on 16-jan-13,moneycontrol.com *-
  38. 38. >Refractories: 73% of total revenue for year ended march 2012 came from it's refractory business. Particular 201203 201103 201003 200903 200803 Installed Capacity(M.T) N/A 16000.00 16000.00 16000.00 16000.00 Capacity Utilized(CU)(%) N/A 98.94 76.96 71.65 75.52 CU Growth rate(YoY)(%) N/A 28.56% 7.41% -5.12% -28.41% 201203 201103 201003 200903 200803 Installed Capacity(M.T) N/A 28000.00 28000.00 28000.00 28000.00 Capacity Utilized(CU)(%) N/A 61.91 65.76 97.05 76.96 CU Growth rate(YoY)(%) N/A -5.85% -32.24% 26.10% -28.94% >Monolithics: Particular Source:Ace Equity Database
  39. 39. 70 64.58 60 57.57 50 40 61.74 59.84 46.36 36.56 EBITM 30 21.37 20 10 ROCE 15.04 20.98 17.24 16.57 17.89 0 2008 2009 2010 2011 2012 2013 *Segment asset given in balance sheet is used as a proxy to capital employed
  40. 40. 70.00% 61.74% 60.00% 50.00% 40.00% 40.43% ROE 30.00% ROCE 23.12% 20.00% 16.24% 14.63% 12.46% Vesuvius India IFGL Refractories 10.00% 0.00% Orient Refractories Based On FY13'03 financial results
  41. 41.  Orient    Refractories:- Acquired by $1.29 billion German Major RHI Group, globally operating supplier of high grade refractory products,systems and services. RHI Group Revenue by segment and region(2012):  Vesuvius India:  Vesuvius India is a part of $1.38 billion Vesuvius Plc,a UK based group engaged in metal flow engineering,developing,manufacturing and marketing ceramic consumable products and systems to the global steel and foundry industries.  Vesuvius Plc revenue by segment and region(2010): Source:Rhi-ag.com,reuters.com
  42. 42.         The RHI Group sets ambitious goals for 2020: Revenues of EUR 3 billion and an EBIT margin of ≥12%! In the year 2012, RHI generated 56% of its revenues in the emerging markets. In the year 2020, this share may amount to 70%. Southeast Asia and especially India are currently among the most attractive markets for refractory products. India is one of the fastest growing markets for refractory products. RHI Refractories had been the largest importer of refractories in India before 2007. RHI, has picked up 51% stake in Clasil Refractories,India in Feb 2007 RHI closes acquisition of 43.6% stake in Orient Refractories Ltd. India in March 2013. Source:RHI annual report,Economic times
  43. 43.     . ORL is a strategic fit as it strengthens market position in a high growth market (difficult to access from outside) and has a proven track record of very profitable growth (high margin products; low cost manufacturing). RHI: sales 2007-12: 47 => € 102 million (CAGR: >16%); average EBIT margin~8.5% ORL: sales 2007-12: 19 => € 44 million (CAGR: >18%); average EBIT margin >15% Strategy for ORL -More than double ORL’s business until 2020 -Push ORL products outside India through RHI’s sales network (esp. Asia, Middle East) -ORL will stay a listed company and keep the brand name and the business model in India. -ORL gets access to RHI R&D know-how as well as group purchasing conditions. Source: RHI's analyst day data presentation,Porsgrunn
  44. 44.  The RHI Group has pursued a clearly defined strategy for many years, which is based on expanding market presence in the emerging markets, increasing self-supply with magnesia raw materials and an optimized cost structure.  Continuous solutions which constantly increases the competitive advantage: that’s what distinguishes RHI and makes it unique.  The RHI Group set ambitious goals for 2020: Revenues of EUR 3 billion and an EBIT margin of ≥12%. Particular Revenue EBITM PATM ROCE ROE 201212 (in Euro mill.) 1835.7 9.13% 6.18% 13.74% 23.62% Source:Annual Report 2012
  45. 45.  India has emerged as the fourth largest steel producing nation in the world, as per the figures release by World Steel Association in April 2011.  The Indian steel industry accounted for around 5% of the world’s total production in 2010.  Further, if the proposed expansion plans are implemented as per schedule, India may become the second largest crude steel producer in the world by 2015-16.  The demand for steel in the country is currently growing at the rate of over 8% and it is expected that the demand would grow over by 10% in the next five years. Source:www.indiasteelexpo.in
  46. 46. Source:RHI-AG
  47. 47. Current Market Price Offer Price Profit Expectation Cost Of Execution Return Expectation 37.5 43 5.5 Acquirer's Name Shares to be acquired( Offer Size) AcquirPromoters group holding Old er's Name Stake acquired from old promoter No. Old Promoter holding after open offer Shares to be acquired (Offer Size) Open Offer31236192 Acquirer's Stake AFTER Acquirer's stake before Open offer RHI Group 31236192 RHI 58399665 52380691 Percentage 6018974 26%83616883 52380691.2 43.60% 14.67% 0.25% 14.42% 26% 48.6% 43.6% 5.0% 69.6%
  48. 48. Source:BSE India
  49. 49. Source:BSE India
  50. 50.  Retail Shareholders:- As seen in Open Offer that all retail shareholders are generally not aware/take effort to tender shares in open offer because of documentation process.  Shareholders holding Shares in Physical Form don’t even track stocks regularly.  Institutional Holders who see long term value in target company. Examples:-Glaxosmith Consumer ,HUL ,Crisil Ltd.
  51. 51.  With 70% acceptance ratio , the price for the residual shares drops to Rs 25 against the market price of Rs.39 before open offer. In other words, we can create shares in Orient Refractories at a substantial discount to current price.  Orient Refractories has become the Indian subsidiary of the world’s largest refractory player ( RHI AG). At adjusted price of Rs 25, stock will be available at PE of 7.46x, PB of 4x and Dividend Yield of 4%.  Considering the backing of RHI group (the largest refractory manufacturer in the world), will give Orient Refractories access to larger international markets and attractive valuation.
  52. 52. Source:nseindia.com,prices are taken on closing basis.
  53. 53.  Open Offer :- Introduction  Checklist of Open Offer.  Using Open Offer to create cheap shares Examples from our Investment History:1.Orient Refractories 2.Shanthi Gears 3.Liberty Phosphate  Highly Liquid Vs Illiquid Open Offers Examples:- HUL , Crisil and Gujarat Auto. 61
  54. 54.  Shanthi Gears Ltd (SGL) was established in 1972.  It’s product portfolio encompasses a range of customized gear boxes, loose gears, worm gear boxes and helical gear boxes.  Tube Investment (TI) acquired the promoter’s stake (i.e. 44.12%) of SGL for INR 2.92 billion i.e. INR 81/share.  As a result of the above transaction, mandatory open offer to acquire another 26% got triggered.  New promoters(TI) announced open offer to acquire 26% on 20 th July.
  55. 55. Acquirer's Name Shares to be acquired(Offer size) Acquirer's stake before open offer Acquirer's stake after open offer Tube Investment of India Ltd.(Murugappa Group) No. Percentage 21246122 26.00% 36050291 44.12% 57296413 70.12%
  56. 56. Particulars Tube Investment Ltd. Preferential Allotment Conversion of GDR Total of the above parties to agreement Promoter holding Individuals Trust Public Shareholding Non Promoter Corporate Retail Public below 1 lac Retail public above 1 lac Total Institutions Non-Resident Indians Overseas Corporate Bodies Clearing Member Trust Director Relatives & Friend HUF Grand total No.of Shares %Holdings June End 0 0.00% 0 0.00% 36,050,291 28,950,291 7,100,000 45,665,562 3,890,064 22,397,005 1,739,613 15,345,723 1,222,141 3,053 216,545 3,000 117,328 731,090 81,715,853 44.12% 35.43% 8.69% 55.88% 4.76% 27.41% 2.13% 18.78% 1.50% 0.00% 0.26% 0.00% 0.1% 0.9% 100.0% No.of Shares %Holdings September End 36059741 44.13% 0 0.00% 0 0.00% 36,059,741 44.13% 0 0 0 45,656,112 9582147 17561364 1541486 15126209 831484 3,053 347141 3,000 5000 655228 81,715,853 0.00% 0.00% 0.00% 55.87% 11.73% 21.49% 1.89% 18.51% 1.02% 0.00% 0.42% 0.00% 0.0% 0.8% 100%
  57. 57. Assume Tender from various categories of Shareholders:Best 70% 30% 80% 75% Probable 80% 45% 80% 80% Shares Likely to be tendered 25,165,228 29,030,597 31,825,445 28,705,539 44,645,743 Total Offer Surplus /Deficit % of shares getting accepted % of shares getting rejected 21,246,122 3,919,106 84% 16% 21,246,122 7,784,475 73% 27% 21,246,122 10,579,323 67% 33% 21,246,122 21,246,122 7,459,417 23,399,621 74% 48% 26% 52% 68 81 0 68 81 32.5 68 81 42 Non Promoter Corporate Retail public Total institutions Total foreign Purchase Open offer Exit Price Value of Remaining Shares Worst Actual 90% 50% 85% 95% 80% 40% 84% 83% 68 81 31 Theoretical 100% 100% 100% 100% 68 81 56
  58. 58.  TI is in the industrial chain business, which caters to power transmission business. Gearbox also forms a part of industrial power transmission. So acquirer wanted to move up the value chain from the current crop of chains into more specialized chains and related systems.  TI expected to improve its overall margins as Shanthi Gears operating profit margin stood at 39 per cent in FY12 compared to Tube’s 10.5 per cent.  TI expected to increase capacity utilization to 90% in next 3 years from current 35-40 per cent as Shanthi Gears went slow on low-margin orders. This is probably why the acquisition price looks a bit high. Source:Livemint.com, tiindia.com-investor meet
  59. 59.  Investment Thesis: Value Investor Perspective  Our actual cost was Rs 31 per share( against offer price of Rs 81) so we have invested with long term perspective. Now the Share are traded at Rs.55-60 in market.  Shanthi Gears EBITDA & PAT margin are 22.81% and 15.01% respectively, however ROE is low( ~ 11.79%) but that is because of low asset turnover(Capacity Utilization). Capacity utilization for company was ~ 30% at time of open offer.  As acquirer is determined to bring capacity utilization from 30% to 90%, asset turnover is expected to improve that will ultimately increase ROE & margin.
  60. 60. Note:- Remaining Market Share Exit Price is taken on the basis of market price of Share before the open offer announcement.
  61. 61.  Market price of the Share few months before the open offer announcement.  Fundamentals of Companies on the basis of PE, PB, DCF, Dividend Yield etc.  Possibilities of synergies being generated by Acquirer in target company.
  62. 62.  In our calculation for exit price of remaining shares of Shanthi Gears Ltd. after closure of Open offer is estimated on the basis of following parameter mentioned below:-  Conservatively took Rs. 48 as exit price in previous slide.
  63. 63. Company came up with an open offer on 13th July, 2012. We entered one week after the announcement @ price of Rs 68 . Open offer ended on November 2012. Hence, in just 5 months we earned 9% return on our capital. (Annualized Return~21.6%)
  64. 64.  Open Offer :- Introduction  Checklist of Open Offer.  Using Open Offer to create cheap shares Examples from our Investment History:1.Orient Refractories. 2.Shanthi Gears. 3.Liberty Phosphate  Highly Liquid Vs Illiquid Open Offers Examples:- HUL , Crisil and Gujarat Auto. 74
  65. 65.  Liberty Phosphate Ltd. took birth in 1976 and carried out expansion time to time to enhance its capacity to cope up with the increasing demand. Now the group is having manufacturing capacity of 7,25,000 MTs. per annum of SSP fertilizer and 1,65,000 MT per annum of NPK, claiming to be one of the major SSP manufacturing company in the country known as 'LIBERTY PHOSPHATE LIMITED‘.  At present, the company is having 14.25% market share of the total consumption of SSP in the country. The group is engaged mainly in the production & sales of SSP and also supplies 100% water soluble to the farmers of Gujarat, Madhya Pradesh and Maharashtra. The group is importing the same from well reputed manufacturer SQM from Belgium in loose form and packaging in India in very popular 'Double Horse' brand before supplying.
  66. 66.  Coromandel International Limited :- One of the largest companies within the Murugappa Group, Coromandel International, has been vitalizing the agricultural sector since its inception in 1964 under the name Coromandel Fertilizers. Today, Coromandel International is a leading manufacturer and markets a wide range of Fertilizers, Speciality Nutrients, Crop Protection and Retail. Coromandel International acquired Liberty Phosphate Ltd. Promoter’s stake of 62% at Rs. 241 per share and made the mandatory open offer for 26% at same price.
  67. 67.  Acceptance Ratio & Profit Calculation Analysis: Assume Tender from various categories of Shareholders:Best 70% 30% 80% 75% Probable 90% 40% 80% 80% Worst Theoretical 95% 100% 55% 100% 95% 100% 100% 100% Actual 80% 70% 80% 100% Shares Likely to be Tendered 3,130,318 3,649,535 4,522,810 5,569,966 4,728,361 Total Offer Surplus /Deficit % of shares getting accepted % of shares getting rejected 3,753,932 -623,614 120% -20% 3,753,932 -104,397 103% -3% 3,753,932 768,878 74% 26% 3,753,932 1,816,034 67% 33% 3,753,932 974,429 79% 21% Purchase Open offer Exit Price 215 241 215 241 215 241 215 241 215 241 Remaining Market Sell Exit Price 130 130 130 130 130 263.1 48.1 22.4% 244.2 29.2 13.6% 211.8 -3.2 -1.5% 204.8 -10.2 -4.7% 218.1 3.1 1.5% Non Promoter Corporate Retail public Total institutions Total foreign Composite Exit Price Profit Profit %
  68. 68.  Short Term Play in Open Offer: The Share was trading at Rs.210 after the announcement of open offer at Rs.241, the gap between prices was Rs.31(14.76%).  Assuming the acceptance ratio (worst case) @ 82%. The stock became attractive to purchase . We made an entry on that level and within 15 days stock reached Rs.227 per share and we exited after booking 8% profit. Source:- Google Finance
  69. 69.  In our calculation for exit price of remaining shares of Liberty Phosphate after the closure of Open offer is estimated on the basis of following parameter mentioned below:Pricing parameters before Open offer announcement Unit Value Market price Rs. 210 Last six month Wtd. Avg. Closing Price Rs. 159 Last Three Month Wtd. Avg. Closing Price Rs. 170 52 Week High Rs. 224 52 Week Low Rs. 46 DCF Value (Intrinsic value per share) Rs. 109 Average Rs. 153  On Conservative basis we took Rs. 130 as exit price in previous slide.
  70. 70.  As per our calculation the exit price was around Rs.130 but after the open offer closed, the Share price came down to Rs. 90.  Reasons for sharp fall in price :1. Arbitrageur Selling. 2. No Institutional/Mutual fund Support.  After the arbitrageur selling got over the share price bounce back to Rs. 130 Level.
  71. 71.  Open Offer :- Introduction  Checklist of Open Offer.  Using Open Offer to create cheap shares Examples from our Investment History:1.Orient Refractories Ltd. 2.Shanthi Gears Ltd. 3.Liberty Phosphate Ltd.  Highly Liquid Vs Illiquid Open Offers Examples:- HUL , Crisil and Gujarat Auto. 82
  72. 72.  Highly Liquid :- HUL, Crisil Ltd.  Illiquid :- Gujarat Auto Ltd.
  73. 73.  At the time of HUL Open offer, the Share was highly traded and also available in Future Segment .  Just before the open offer closing date the Share was easily available at below open offer price. Stock was trading at Rs. 583 against open offer price of Rs.606 per Share.  One could easily earn the return of 3.9% in a month. But Investors failed to take the benefit because of their low acceptance ratio calculation but contrary to that all the shares were accepted in the open offer.
  74. 74.  Acceptance Ratio & Value of Remaining Shares Analysis:Assume Tender from various categories of Shareholders:Best Non Promoter Corporate Retail public Total institutions Total foreign 70% 30% 70% 75% Probable 80% 40% 75% 80% Worst 90% 50% 85% 90% Theoretical 100% 100% 100% 100% Actual 28% 15% 39% 42% Shares Likely to be offered 596,641,893 666,013,221 768,408,937 1,027,622,850 319,563,398 Total Offer Surplus /Deficit % of shares getting accepted % of shares getting rejected 487,004,772 487,004,772 109,637,121 179,008,449 82% 73% 18% 27% 487,004,772 281,404,165 63% 37% 487,004,772 540,618,078 47% 53% 487,004,772 -167,441,374 152% -52% 583 606 500 567.2 -15.8 -2.7% 583 606 500 550.2 -32.8 -5.6% 583 606 606 606.0 23.0 3.9% Purchase Open offer Exit Price Remaing Market Sell Exit Price Composite Exit Price Profit Profit % 583 606 500 586.5 3.5 0.6% 583 606 500 577.5 -5.5 -0.9% Note:- Remaining Market Share Exit Price is taken on the basis of market price of Share before the open offer announcement.
  75. 75. 1. Generally, Investors do not tender their shares in open offer if they have invested with long term perspective. 2. Investors took this bet( Deciding not to participate in open offer) seeing the parent bullish stance towards Indian FMCG sector, citing parent paid huge premium for acquiring Shares. 3. Big Investors gave the indication in media that they are not willing to tender their shares in open offer.
  76. 76.  Like HUL, Crisil Ltd also belongs to a liquid category stock. At the time of open offer the share was highly traded.  Just one month before Open offer Closing date the Share was trading at Rs.1120, however open offer price was Rs.1210 per Share.  One could easily earn the return of 8% in a month. But Investors failed to take the benefit because of their low acceptance ratio calculation but contrary to that all the Shares were accepted (100% acceptance ratio) in that open offer .
  77. 77.  Acceptance Ratio & Value of Remaining Shares Analysis:Assume Tender from various categories of Shareholders:Best 70% 30% 70% 75% Probable 80% 50% 75% 80% Shares Likely to be offered 18,285,367 21,819,514 24,515,777 33,026,260 10,623,059 Total Offer Surplus /Deficit % of shares getting accepted % of shares getting rejected 15,670,372 2,614,995 86% 14% 15,670,372 6,149,142 72% 28% 15,670,372 8,845,405 64% 36% 15,670,372 17,355,888 47% 53% 15,670,372 -5,047,313 148% -48% 1120 1210 950 1172.8 52.8 4.7% 1120 1210 950 1136.7 16.7 1.5% 1120 1210 950 1116.2 -3.8 -0.3% 1120 1210 950 1073.4 -46.6 -4.2% 1120 1210 1210 1210.0 90.0 8.0% Non Promoter Corporate Retail public Total institutions Total foreign Purchase Open offer Exit Price Remaing Market Sell Exit Price Composite Exit Price Profit Profit % Worst Theoretical 90% 100% 55% 100% 85% 100% 90% 100% Actual 40% 24% 45% 45% Note:- Remaining Market Share Exit Price is taken on the basis of market price of Share before the open offer announcement.
  78. 78.  In Gujarat Auto Promoters Holding was 70.62% and acquirer acquired 55% from promoters and hence had to come up with an open offer for 26%.  On the point of acceptance ratio, it was near to 100% i.e. (70.62% +26%=96.62%).  Post the open offer announcement, Shares were available in the market around Rs.1030 per share against the open offer price of Rs.1137 per share.  So, there was an evident risk free arbitrage of approximately 10% available in the span of just 2.5 months.
  79. 79. Assume Tender from various categories of Shareholders:Non Promoter Corporate Retail public Total institutions Total foreign Best Probable 70% 80% 30% 50% 70% 75% 75% 80% Worst Theoretical 90% 100% 55% 100% 85% 100% 90% 100% Actual 60% 27% 50% 50% Shares Likely to be offered 34,668 54,125 59,723 102,820 29,194 Total Offer Surplus /Deficit % of shares getting accepted % of shares getting rejected 91,000 -56,332 262% -162% 91,000 -36,875 168% -68% 91,000 -31,277 152% -52% 91,000 11,820 89% 11% 91,000 -61,806 312% -212% Purchase Open offer Exit Price Remaing Market Sell Exit Price Composite Exit Price Profit Profit % 1030 1137 1137 1137.0 107.0 10.4% 1030 1137 1137 1137.0 107.0 10.4% 1030 1137 1137 1137.0 107.0 10.4% 1030 1137 1137 1137.0 107.0 10.4% 1030 1137 1137 1137.0 107.0 10.4%
  80. 80.  If really there was a return of around 10% within just 2.5 month, then there is an obvious question to be asked.  Why arbitrageur did not take the benefit of the same..??  The only reason was… “ Thinly Traded (illiquid) Share ’’  But the retail shareholders can take the benefit from these kind of situations.
  81. 81.  Merely the presence of Mutual funds/Institutions is not enough. Because if they see the open offer as an “ exit opportunity ’’ then their presence will not help retail investors any way. Example: Mahindra Forging Ltd  Critical points to look out for:  Shareholding ( How significant is their investment? )  Their views ( Invested for short term or long term? )
  82. 82.   ShareholdingIf Mutual Funds/Institutional investors have significant holding( like in HUL 30% and Crisil ltd. 26.5%) then they will play a significant role in deciding acceptance ratio for retail investors.  However, if their holding is insignificant then their presence will not affect retail investors.  Their ViewsIf the Mutual Funds/Institutional investors have long term view on target company then they don’t participate in offer, which ultimately increases the “ acceptance ratios ’’. Example: -HUL, Crisil ltd.   Even if they tender the shares in open offer they again buy post open offer at lower price, which gives price support to retail investors. Example:- Shanthi Gears Ltd.
  83. 83.  Hexaware is India's ninth largest IT exporter with annualized revenue of Rs 912 crore in FY12. The company is also sitting on cash and equivalents worth Rs 590 crore.  The Baring Asia Private Equity Fund acquired 41.47% stake in Hexaware Technologies Ltd. And hence had to come up with open offer of 26% in compliance with Regulation 3(1) and 4 of SEBI (SAST) Regulations  Company made announcement of open offer on 23-Aug-13. The open offer price was Rs.135 per share.  Baring Asia manages assets worth $5 billion — provides expansion, restructuring and acquisition capital to middle market companies.
  84. 84. Are they buying from open market route..??  In Hexaware Technologies Ltd. the acquirer after announcement of open offer started purchasing the Shares from the open market and acquired approx 8.76% of diluted equity capital.  When acquirer start buying shares from open market, it start changing the acceptance ratio every time.
  85. 85. Please feel free to contact me with any unanswered questions, suggestions & ideas.  ashishkila@gmail.com  +91-9999751327 Perfect Research T-24A Green Park Extn. New Delhi – 16 Blog: http://perfectresearch.blogspot.in Twitter: @ashishkila

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