Special Situations Investing - MDI 2020

Special Situations Investing
Ekansh Mittal
Founder, Katalyst Wealth
Mittal Consulting www.katalystwealth.com

Table of Contents
1. What is a Special situation?
2. Types of Special situation Opportunities (SSOs)
3. Our SSO Investing strategy
4. Delisting – Case Studies
5. Demerger – Case Studies
6. Bad Ones
7. Track Record
8. Resources

What is a Special situation?
As per Investopedia –
A special situation refers to particular circumstances involving a security that would compel investors to buy the security based on the special
situation, rather than the underlying fundamentals of the security. This type of investment is an attempt to profit from a potential
rise in valuation that the special situation presents. There could be a near-term catalyst to quickly gain from the resolution of a special situation,
or it could take many months or years.
Special situation investment opportunities can take many forms and involve multiple asset classes. Typical special situations can arise
from spinoffs, tender offers, mergers and acquisitions, bankruptcy or distress, litigation, capital structure dislocations, activism, or just complexity
that the market does not understand.

Types of SSOs
Delisting
• Delisting is the removal of a
listed security from a stock
exchange.
• The delisting of a security
can be voluntary or
involuntary.
• Usually results when a
company ceases
operations, declares
bankruptcy, merges, does
not meet listing
requirements, or seeks to
become private.
Demerger
• The segregation of a large
company into two or more
smaller organizations.
• It allows a conglomerate,
to split off its
various brands or business
units to invite or prevent
an acquisition, to raise
capital by selling off
components that are no
longer part of the
business's core product
line, or to create separate
legal entities to handle
different operations
Buyback
• It refers to a corporate
action where a company
repurchases its own shares
from the existing
shareholders.
• The buyback can be done
through tender offer route
or through open market
purchases.
• In the former, the company
fixes a buyback price and
accepts shares on a
proportionate basis during
the buyback period.

Our SSO Investment strategy
1. In general SSOs don’t account for more than 20%
of our portfolio at any point of time
2. The idea is to maintain some liquidity (10-15%) at
all times and use SSOs as temporary parking
places for surplus cash
3. Generate extra return on liquid funds
4. General allocation strategy is 4-5% in each
opportunity
5. Never go overboard with allocation in any one
opportunity…unless there’s hedging opportunity
6. Think of the downside first, as the event takes
care of the upside
7. On an average participate in 5-7 opportunities in a
year

Delisting
Our Delisting Strategy – The Man on the Wrong Side of the Road

How delisting works
In the delisting process, Promoters engage in reverse book building (RBB) to
determine the price to be paid to public shareholders to make the company private.
This is how it works:
1. Assume a company with Promoter holding 68% and 1 crore outstanding shares
to be delisted
2. Floor price Rs 400
3. During RBB, public shareholders place their bids at 400 or above
4. For promoters to announce the exit price (final offer price), their holding should
reach 90%
5. In the above case, Promoter holding reaches 90% only when at least 22 lakh
shares get tendered
6. The cumulative tendered quantity crosses 22 lakh mark at 509 and thus the
same becomes the discovered price.
7. If Promoters find it suitable, they can announce 509 (or more) as the offer price
for delisting and complete the process.

Delisting – Case study #1: Ricoh India
Salient Points:
1. On 11th Nov’13 Board of Directors approved the voluntary delisting proposal
2. Stock shot up from 60 odd levels on 8th Nov’13 to 105-110 over the next few days
3. Initiated on 19th Nov’13 around 107-108 odd levels
4. Floor price Rs 58.01/- per share
Rationale:
1. Second de-listing attempt…First one failed as requisite number of shares were not tendered
2. In the first delisting RBB, maximum number of shares were tendered around 130/- odd levels
3. Thus, Promoters announcing 2nd delisting attempt, despite knowing that shareholders sought around 130/- per share in the first one gave us
the confidence to participate in the opportunity at around 107-108 odd levels with floor price of Rs 58.01/- per share
4. Outside Japan, Ricoh India only other listed company of Ricoh Group…another indication that they desperately wanted to delist
Timely Exit and Some Major Learnings

Screenshot from Jun’14 note

How it panned out:
1. Invested in Ricoh India on 19th Nov’13 around 107-108 odd levels
2. In the RBB ending on 9th Jun’14, required number of shares got tendered with Rs 225 as the discovered price
3. Sold Ricoh on 10th Jun’14 around 215 odd levels
4. Absolute Return – 99.07%
5. SENSEX Return – 22.54%
6. Duration – 7 months

Delisting – Case study #2: Linde India
Salient Points:
1. On 9th Nov’18 the company announced to exchanges about the letter received on 7th Nov’18 from the Promoters expressing their intent to
delist
2. Stock shot up from 450 odd levels on 6th Nov’18 to 580-600 over the next few days
3. Initiated on 12th Nov’18 around 597-598 odd levels
Rationale:
1. At the global level, pursuant to merger of Linde AG and Praxair, Linde Plc acquired control over Linde AG and thereby indirectly over Linde
India
2. Due to indirect acquisition, Linde Plc had to mandatorily make an open offer to acquire 25% from Public shareholders
3. As the Promoters were already holding 75% equity stake, they decided to proceed with the open offer cum delisting offer
4. Floor price Rs 428.50/- per share
5. MNC promoter with Mcap in excess of 650,000 crore and annual sales of more than 200,000 crore.
6. Linde India’s Mcap ~5000 crore and acquiring 25% would have cost 1000-2000 crore (depending on the delisting price)
Well Defined Exit Strategy

Delisting – Case study #2: Linde India
How it panned out:
1. Invested in Linde India on 12th Nov’18 around 598 odd levels
2. Sold Linde India on 11th Jan’19 around 790 odd levels
3. RBB Dates – 15th Jan’19 to 21st Jan’19
6. Duration – 2 months

Delisting – Case study #3: Hexaware Technologies
Salient Points:
1. On 5th Jun’20 the company announced to exchanges about a letter received from the Promoters (Baring Private Equity Asia) with a proposal
to voluntarily delist the shares
2. Stock shot up from 260 odd levels on 4th Jun’20 to 320-330 over the next few days
3. Initiated on 8th Jun’20 around 330 odd levels
Rationale:
1. Baring (through HT Global IT Solutions) had 62.4% stake in the company
2. Promoters had Indicated an offer price of Rs 285 per share
3. Baring had acquired controlling stake in Hexaware in 2013 and since 2016 it had been exploring the option of sale of Hexaware
4. In 2018, it managed to sell an 8% stake through block deals for Rs 1,120 crore, thus giving the company then a market capitalization of Rs
14,000 crore against market cap of Rs 9,900 crore at the time of our purchase
5. Hexaware had been performing well with 5 Years CAGR of 18% for sales and 14% for PBT
6. The stock was available around 14.5 times earnings
7. Delisting offer seemed like an attempt to make use of the depressed market conditions to take the company private and sell it subsequently
to other interested investors

Delisting – Case study #3: Hexaware Technologies
How it panned out:
1. Initiated on 8th Jun’20 around 330 odd levels
2. Closed on 7th Sep’20 around 405-410 odd levels
3. RBB Dates: 9th Sep’20 to 15th Sep’20
6. Duration – 3 Months
7. RBB successful and promoters accepted the discovered price of 475 per share

Delisting – Case study #4: Vedanta
Salient Points:
1. On 12th May’20 the company announced to exchanges about a letter received from the Promoters with a proposal to voluntarily delist the
shares
2. Indicative offer Price – Rs 87.5/-
3. Floor Price (announced on 18th May’20) – Rs 87.25/-
4. RBB Dates (announced on 29th Sep’20) – 5th Oct’20 to 9th Oct’20

Delisting – Important Learnings
1. The underlying fundamentals of the business are generally not supportive
2. Avg. time line – 3-4 months
3. Decent absolute returns…though downside also tends to be higher (if the exit is not timely)
4. Important to think differently and not necessarily follow the defined path
5. Important not to aim for the maximum possible returns
6. Aim for smaller consistent gains
7. MNC Delisting’s have a better track record

Demerger
• Acts as a Catalyst
• Creation of Low cost shares of Favorite business

Demerger – Case study #1: Cinemax India
Salient Points:
1. On 30th Sep’11, Board of Directors approved the demerger of Cinemax India (CIL)
2. Demerger of Theatre exhibition division comprising of multiplex theatres into Cinemax India exhibition ltd (CEIL), while retaining Retail space
division consisting of Malls constructed for sale and lease to third parties in CIL
3. Demerger ratio – 1:1 (1 new share of CEIL for every 1 share held in CIL)
4. Stock was available at 100 crore Mcap and 0.55 times book value. Also, it was generating ~20 crore CFO (after deducting interest)
Low Downside…Wasn’t sure of the Upside; Got Lucky

• As at Sep’11, the company’s net worth was Rs
180 crore, while the current market cap of the
company is Rs 100 crore i.e. 55% of the net
worth of the company.
• Compare this with INOX’s market cap of Rs
295 crore at 90% of its net worth and PVRs
market cap of Rs 372 crore at 108% of its net
worth.
• PVR does have a relatively better balance
sheet in comparison to INOX and Cinemax and
thus deserves a premium, however INOX and
Cinemax are comparable w.r.t. their size,
operations and efficiency.
• We believe that Cinemax is trading at a
substantial discount considering the industry
standards.
Screenshot from Jan’12 Report

How it panned out:
1. Investment in Cinemax India in Jan’12 around 34-35 odd levels
2. Ex-date – 17th May’12
3. Sold Cinemax Properties in Jun’12 around 14 odd levels
4. Sold Cinemax Exhibition in Oct’12 around 58 odd levels
5. Absolute Return – 108%
7. Duration – 9 Months

Demerger – Case study #2: Greenply – Greenpanel Demerger
Salient Points:
1. Initiated on 26th Jan’19 around 131 odd levels
2. Company had announced the Demerger of MDF business and Plywood unit at Uttarakhand into Greenpanel Industries
3. Demerger ratio – 1:1 (1 new share of Greenpanel for every 1 share held in Greenply)
Rationale:
1. Stock was down more than 60% from its highs and offered decent value
2. Focus on creation of low cost shares of Greenpanel Industries, i.e. the MDF business as saw good potential in the same despite near term
headwinds
Creation of Low Cost Shares of Favorite Business

Screenshot from Jan’19 note

How it panned out:
1. Invested in Greenply before de-merger in Jan’19 around 131 odd levels
2. Ex-date – 12th Jul’19
3. Sold Greenply on 18th Jul’19 around 129 odd levels, effectively creating free of cost shares of Greenpanel Industries
4. Greenpanel listed on 23rd Oct’20 around 40 odd levels
5. CMP is 60-65 while we sold out around 27-28 in May’20 considering the impact of COVID-19 on the business

Demerger – Important Points
1. Similar to value investing
2. Demerger acts as a trigger for value unlocking and can speed up the process
3. Works best when there are contrasting businesses
4. Scope for positive surprises
5. Holding period longer than other two
6. From the time of announcement of Scheme of Arrangement involving demerger to the time of listing of
resulting company, the process can take 9-12 months
7. More the number of regulators involved, longer the time period
8. Post the High Court approval, the risk of delay minimizes

Bad ones
Year Category Company Return Reasons
2018 Demerger Arvind -53% • There wasn’t much upside
• Stock corrected before the ex-date, so didn’t get
good exit opportunity
• Flagship business Arvind Fashions facing
slowdown since listing and then the pandemic hit
the retail business further
2018 Delisting Wintac -10% • Bought at 225-226 with floor price of 220
• Limited upside as shares mostly cornered by
Promoters and related entities
• First application rejected by Department of
Pharmaceuticals, Govt. of India
• Too many regulatory hurdles and continuous delay
2018 Demerger CESC -9% • Company couldn’t go through the original scheme
of arrangement of separation of Power generation
and Distribution businesses
• Again reservations from regulator – this time West
Bengal Power Regulator

Track Record
Year
No. of
Opportunities
Avg. Return
Avg. Return
Sensex
Avg. Duration (In
Months)
2012 12 14.95% 5.39% 2.7
2013 12 23.88% 6.93% 4.2
2014 7 14.43% 8.12% 3.4
2015 3 17.17% -2.94% 10
2016 4 -8.76% 2.99% 9
2017 8 15.70% 7.46% 3.7
2018 8 -12.12% 5.44% 12
2019 5 55.30% 4.70% 12.9
2020 5 7.31% 11.31% 3.3

Resources
1. https://www.bseindia.com/ - Daily Corporate
announcements
2. https://www.sebi.gov.in/ - Important offer
documents
3. https://www.google.com/ - In the news tab,
simply type terms like “demerger”, “delisting”,
“buyback”, etc for the latest articles on the
ongoing cases

Disclaimer
www.katalystwealth.com (here in referred to as Katalyst Wealth) is the domain owned by Mittal Consulting. Mr. Ekansh Mittal is the sole proprietor of Mittal Consulting and offers independent
equity research services to Investors on subscription basis. SEBI (Research Analyst) Regulations 2014, Registration No. INH100001690
Use of the information herein is at one’s own risk. This is not an offer to sell or solicitation to buy any securities and Ekansh Mittal/Mittal Consulting/Katalyst Wealth will not be liable for any
losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein.
Before acting on any recommendation, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice.
Disclosure SEBI (RA) Regulations
Whether the research analyst or research entity or his associate or his relative has any financial interest in the subject company/companies and the nature of such financial interest – Research
Entity or its associates may own or may have owned in the past some of the companies discussed in the presentations.
Whether the research analyst or research entity or his associates or his relatives have actual/beneficial ownership of 1% or more securities of the subject company (at the end of the month
immediately preceding the date of publication of the research report or date of the public appearance) – No
Whether the research analyst or research entity or his associate or his relative has any other material conflict of interest at the time of publication of the research report or at the time of public
appearance – No
Whether it or its associates have received any compensation from the subject company in the past twelve months – No
Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past 12 months – No
Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months – No
Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the
past 12 months – No
Whether the subject company is or was a client during twelve months preceding the date of distribution of the research report and the types of services provided – No
Whether the research analyst has served as an officer, director or employee of the subject company – No
Whether the research analyst or research entity has been engaged in market making activity for the subject company – No

Thank You
For more information, please contact
Ekansh Mittal
Founder, Katalyst Wealth
Email: info@katalystwealth.com
web: www.katalystwealth.com
Twitter - @katalystwealth

Special Situations Investing - MDI 2020

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