Delisting Ideas - A Case Study_IIF Meet_1st Oct 2011

8/3/2019 Delisting Ideas - A Case Study_IIF Meet_1st Oct 2011

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Delisting a case study4/22/2012

Ashish Kila

IIF Meet, 1stOct 2011


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Road Map

What is Delisting

Why Delisting Now

Delisting Regulations / Process Evaluation of Delisting as an investment opportunity

Delisting candidates

Current Delistings going on

Delisting Idea @ Timken India

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What is Delisting?

Permanent removal of securities of a listed company from a stockexchange.

As a consequence of delisting, the securities of that company wouldno longer be tradable at that stock exchange.

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Why everyone is talking about

Delisting4/22/2012

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Why Delisting Now

Most important Reason .a deadline

The Union Finance Ministry came out with the "minimum public

shareholding guidelines" on June 4, 2010, which were laterrevised on August 9, 2010

PSUs are expected to maintain minimum public shareholding of10 per cent within a period of three years. And, for the privatesector, it shall be 25 per cent over three years.

That is, companies have time till June 3, 2013 to comply with thisrequirement.

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Why Delisting Nowother reasons

Lenient FDI norms and removal of sector caps

No need for funds/capital markets access

Strategic move for greater independence and lower costs. Depressed market conditions.

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Types of Delisting

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Delisting

Compulsory

Delisting

Voluntarydelisting

Voluntarydelisting from allthe exchanges.

Exit opportunity

Voluntary

delisting fromfew exchanges

but remainslisted on at least

one stockexchange

having nation

wide terminals

No exitopportunity

Small Company(whether listedat any of theExchanges)

No Bidding, butexit opportunity

is there

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Voluntary Delisting Regulations4/22/2012

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Delisting Process

Board of Directors approves delisting

Company seeks shareholder approval for delisting the shares usingpostal ballot. Only the public shareholders can participate and votesin favour of delisting must be atleast two times those against.

In-principle application to stock exchange for delisting, which will

be disposed off by stock exchange in 30 days

Competition Commission Approval

Public Announcement

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Competition Commission Approval

Approval required from 1 June 2011,

CCI will reply within 180 days of the filing of notice by thecompanies.

Applicable

Either, in India,

the assets > Rs 1000cr or turnover > Rs 3000 cr;

or

in India or outside India,

Assets > $500m, including at least Rs 500 cr in India, or

turnover > $1500mn including at least Rs 1500 cr in India

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Conditions required before making PA

Receipt of in-principle approval for delisting from the recognisedstock exchange

Appointment a merchant banker

Promoter shall open an escrow account and deposit therein the totalestimated amount of consideration calculated on the basis of floor

price and number of equity shares outstanding with publicshareholders

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Delisting Offer

The date of opening of the offer shall not be later than fifty fiveworking days from the date of the public announcement.

The offer shall remain open for a minimum period of three workingdays and a maximum period of five working days,

A promoter or a person acting in concert with any of the promoters

shall not make a bid in the offer

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Floor Price Infrequently traded sharese.g. Alfa Laval

Annualised trading turnover in such shares during last 6 months, isless than five per cent of the total listed equity shares

Floor price shall be determined by the promoter and the merchantbanker taking into account the following factors:

(a) the highest price paid by the promoter for acquisitions, during

last 26 weeks upto the date of the public announcement; and,

(b) other parameters including return on net worth, book value ofthe shares of the company, earning per share, price earning multiplevis--vis the industry average.

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Requirements

In order to delist the company from the exchanges, the promotersmust follow the reverse book building process, at the end of whichthey must fulfill two conditions;

1. They must hold more than 90% of the shares.

2. They must buy out more than 50% of the non promoter

shareholding through the reverse book building route (calculatedbefore delisting offer)

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Indicative Offer Price

Price indicated by Management as the fair price for the investors tobid in reverse book building

The effect is that such price becomes effectively the new floor like incase of Binani, Atlas Copco etc.

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Discovered Price

The final offer price shall be determined as the price at which themaximum number of equity shares is tendered by the publicshareholders.

The promoter may, if he deems fit, fix a higher final price. E.g. AtlasCopco

The promoter shall not be bound to accept the equity shares at theoffer price determined by the reverse book building process.

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Delisting Process

The company launches reverse book building to discover the priceat which it can buy the required outstanding shares.

The company has to make the final application to the stockexchange within one year of passing of the special resolution thrupostall ballot

Shares not tendered/accepted in bidding period can be tendered tillatleast one year from the date of delisting

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Regulations

Within eight working days of closure of the offer, the promoter andthe merchant banker shall make a public announcement regarding:-

(i) the success of the offer alongwith the final price accepted by theacquirer; or

(ii) the failure of the offer or

(iii) rejection

Final payment or/& return of shares where bids not accepted withinten working days from the closure of the offer.

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Some Important Points

Bids can be withdrawn or revised upwards only till one day beforethe closing date

Book closes till 5:30-6 pm in the evening, though official time is 3pm atlas copco at 3pm was 49.3%

Price will move closer to the price of delisting price barring interest

rate and transaction costs

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How to evaluate delisting as an

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Parameters/Risks Involved

Deal Risk (contd)

Shareholding Pattern Pattern delistable

Some public shareholding should be required eg binani case

Holding cost of >1% shareholders

Insider selling during delisting (e.g. UTV)

Time Risk

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Valuation Comfort

This is probably the most important parameter to look at. If there isno valuation comfort and delisting fails, the downside could be veryhigh.

Blue Dart Current P/E is ~40 & P/Sales is >3

Saint Gobain Sekurit India

Company has just 90 cr capital invested with an annual sale of


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Management Quality Seek for cases with MNCParentage

Will the management be fair? Most of them are not. Where themanagement quality is extremely questionable, delisting could be avery unfair affair for the minority. Better to stay away

Suashish Diamonds Promoter holding 89.43% - Floor Price 220,rejected the discovered reverse book building price of Rs. 320 inMay10, Deutsche is stuck with its >3% stake in co.

Compact Disk Delisting

24.7% promoter holding and announcing delisting, ultimately gotshelved off because of HSBC filing debt recovery suit.

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Cues from Prior History of Corporate Actions

Management aggressiveness to Delist and indication of premiumthey will pay, if they decide to try delisting again

Blue Dart In 2006, Blue Darts promoter didnt accept theReverse Book Building price of 950.

Disa India In 2007, the discovered price of Rs 2690 was

rejected by the management.

Bosch Chassis in Mar 2008, management rejected discoveredprice of Rs 750 against floor set of 415 Rs. In Aug 2008, it wassuccessful in delisting at 600 Rs.

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Prior History of Corporate Actions

Public/Institutional holders intentions

Kennametal India shareholders rejected the postal ballotconducted in Jan11.

AstraZeneca Pharma shareholders rejected the postal ballotconducted Sep10.

Dispersed Shareholding

BOC shareholders didnt tender the required number of shares inJan11.

Goodyear India shareholders didnt get the required number ofshares in May-June 10.

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Parents Health

Ability to pay Health of parent balance sheet

e.g. Esab India parent company Charter International Plc isfacing tough times due to fierce competition from rivals and isunlikely to make a bid for delisting

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Incentive to Delist

Globally what is parents other subsidiaries structure.

Honeywell Only Indian Subsidiary listed worldwide

Their Focus on India

Goodyear global investor presentation projects China as the nextbig destination & says nothing about India.

Whether they are focussing on India through unlisted subsidiary

Saint Gobain 100% unlisted subsidiary Saint Gobain Glass India with over

Rs 978 cr of sh capital, 1210 cr of sales and 208 cr of profit.

Listed company the company has hardly invested 90 cr ofcapital and does a business of less than 100 crs

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Incentive to Delist

Blue Dart

Spate of fellow subsidiaries, which sport such names of DHLExpress (India) Pvt Ltd, DHL Lemuir Logistics Pvt Ltd, andSkyline Air Logistics Limited.

All incorporated in India

Operating in the India orbit

Similar line of business that Blue Dart is in Goodyear South Asia

Timken India

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Floor Price

Applicable in case where the reverse book building has alreadystarted/has been announced.

Binani Cement had set the floor price set was Rs. 82 which wasbelow the recent buyback at Rs. 90 in which some shares weretendered by the firm.

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Share Holding Pattern

Who are the minority? Are there any 1% plus holders? Are thereprofessional investors who hold large chunk of shares? In caseswhere the non-promoter shareholding is concentrated, delisting

becomes relatively easy.

Easy Patterns

Blue Dart promoters are required to buy back at least 9.5% oftotal shares, 14.3% shares is held by Institutions & CorporateBodies.

Tough ones

Alfa Laval

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Insider Selling.

UTV Some insider selling before the result of postal ballot

1st view theydont think postal ballot will be cleared

2

nd

view they need money to utilise their ESOPs

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Time Risk

Presence ofESOPs like in case of HSBC investdirect/ UTV

HSBC initiated delisting on June 16 2009

SEBI amendment saying all convertible securities need to beextinguished

Process almost took 10 months

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Legal Loopholes

Cookson Plc, the parent of metallurgical chemicals maker FosecoIndia,

Gifted 11.48% of Foseco India stake to Karibu Holdings UK,bringing its stake down to 75% to comply with Indian listing norms,it said in one of its result filings.

Current position

Legally debatable and certainly not in the spirit of the law

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Delisting Tax Treatment

STT is not applicable, so in the case of individuals and investingcompanies.

Special rate of 15% on share term cap gain tax and exemptionon long term cap gain tax will not apply.

Short term Capital gains will be treated as normal businessincome and taxed as per your present tax slab.

Long term will be taxed at 10% without indexation and 20%with indexation.

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List of delisting companies4/22/2012

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Sh holding pattern easy but companies have

denied delisting

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Sh holding pattern easy but valuations on higher

side.

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Oracle a ray of hope . From 2011 SEC filing- As the majority shareholder of Oracle Financial

Services Software Limited, a publicly traded Indian software companyfocused on the banking industry, we are faced with several additionalrisks, including being subject to local securities regulations and beingunable to exert full control


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Valuations very expensive.

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Share holding pattern very difficult.


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List of delisting candidates with some issues.

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List of delisting candidates with reasonable

valuations and share holding pattern doable.

Timken

Honeywell

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Current delisting going on4/22/2012

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Saint Gobain4/22/2012

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Saint Gobain Sh. Holding Pattern - Doable


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Alfa Laval4/22/2012

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Alfa Laval Sh. Holding Pattern - Difficult


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UTV Delisting.

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UTV CMP 950, Indicative Offer Price 1000

Expectation of some premium

Promoter Ronnie to be paid at the price discovered in Reverse Bookbuilding

Last open offer by Disney at Rs 860 in 2008

Risk

Valuations expensive

Time Risk High, due to presence ofESOPs, Postal ballot passed


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UTV Sh.Holding Pattern No Problem


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Exedy Delisting.

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Exedy

CMP 206, Indicative Offer Price 178.5, Floor 141.36

Last open offer by Exedy at Rs 178.5

Postal ballot passed

Risk

Valuations expensive as loss making entity

Time Risk Standard


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Exedy Sh holding pattern doable. 4/22/2012

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Delisting Idea Timken4/22/2012

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Timken India.

Valuation Comfort Performance is improving but still expensive

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Timken India.

Global experience Annual report shows List of subsidiariesshowing ~69 subsidiaries worldwide out of which only 2 of themincl India are listed

Ward timken (Chairman Timken Global) talks about delisting ordiluting its stake- Apr 11, 2011

Very bullish on India and China growth story

Concern

Have an Indian Subsidiary & new major investments through it 200 cr in near future.. Current paid up capital 96 cr In Listedentity 63.7 cr

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Funds avg cost >170

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Account wise breakup

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What if you dont wish to participate in delisting

Exit thereafter is normally a problem

Management might not offer the same price it did in delisting

Cadburys has initiated compulsory buy back minorityshareholders fighting it out The last offer price by Cadbury 1900Rs is much above Rs 500 being offered during delisting

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For any unanswered questions

You can reach me on

[email protected]+91-9999751327

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mailto:[email protected]

Documents

Delisting Ideas - A Case Study_IIF Meet_1st Oct 2011