When multiplex operator INOX Leisure recently acquired a majority stake in its rival, Fame India, it looked like just another takeover. It wasn’t.
Reliance Capital Partners, a part of the Anil Dhirubhai Ambani Group, created a stir the next day when it accused the Fame promoters of ignoring its higher offer price and settling for INOX. After accusing Fame of various things, including lack of transparency and acting against shareholder interests, the ADAG company acquired 11.5 per cent stake in Fame through open market operations.
The ADAG firm's fresh salvo today, saying that it would also make an offer for Fame, shows this might be a long-drawn one affair. Reliance MediaWorks, part of the ADA Group, had earlier asked Fame’s promoter, Shravan Shroff, to explain why he sold his family’s 50.5 per cent in Fame India to INOX Leisure, when Reliance had made a “firm offer” to buy it for Rs 80 a share.
No one knows why Reliance wants to buy more stake in a company in which Inox already has 51 per cent stake, but Fame is clearly in the midst of a furious corporate battle. INOX’s open offer, as mandated by the market regulator, is slated to open in April, but the company may have to revise its offer price of Rs 51. Reliance is obviously making the deal more expensive for INOX, as Fame’s share price touched Rs 75 last week.
“We can call it hostility,” says Sanjay Sakhuja, CEO and Managing Director of Ambit Corporate Finance. He says hostility comes when a bidder believes the assets are undervalued.
Competitive bidding like the one witnessed in this case has gained momentum of late. Consider for example, the price war seen in Great Offshore by the two interested bidders, Bharati Shipyard and ABG Shipyard.
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Other than Great Offshore, there were three bids for acquiring Orissa Sponge Iron & Steel from Bhushan Steel, Bhushan Energy and Monnet Ispat & Energy last year. Such competitive bidding was first seen in 2000, when Delhi-based Abhishek Dalmia bid to acquire Gesco Corporation (now Mahindra Lifespace), but had to give up when the Mahindra group made a counter-bid.
“Companies after achieving a certain scale look at buying other entities for synergies. They have realised that scale matters and also that if they don't buy, there are others who are ready to bid,” says Roy Rodrigues, CEO, Investment Banking, Anand Rathi Financial Services. He says such competitive bids are especially by companies whose core business has become stable and who then look at strengthening the periphery business.
Other than the stable business, companies are also looking to have forward or backward integration. “Such acquisitions are done to have synergies and (also) cut the time frame,” says Ajay Parmar, Head of Research, Emkay Global Financial Services. For instance, ABG Shipyard and Bharati Shipyard wanted to acquire Great Offshore as it was forward integration for them, to be able to sell their ships and offshore support vessels. In the case of Orissa Sponge, the three steel makers were looking at the huge reserves of iron ore, a key raw material for making steel. In the case of Fame India, INOX and Reliance Mediaworks get access to multiplex screens, which would have taken years if they did it on their own.
Experts believe such trends would be seen on companies whose assets are undervalued compared to the market price. “Such undervaluation can be sometimes due to poor corporate governance, lack of disclosure or because the management is not proactive with shareholders,” says Donald D Souza, President, Investment Banking, India Infoline.
But, Sukhija of Ambit says hostile bids in India are difficult, similar to the western world. “In most listed companies in India, there is usually one big shareholder (promoters) who controls a large stake and so, it is very difficult to make a hostile bid,” he says. Even in case of low promoter holding, hostile bids are difficult, as in such companies there are financial institutions who prefer to go with the current managements.
But, such competitive bids benefitted the shareholders of target companies, as the stock price rose sharply after such competitive bids. Fame India’s stock price almost doubled after the deal with INOX. Parmar of Emkay suggests investors should exit just before the open offer begins, as all the shares would not be accepted in the offer and one can buy after the offer’s close, if one consider the new management good.