E Sudhir Reddy, a first generation entrepreneur who formed Hyderabad-based infrastructure giant IVRCL back in 1987, must be kicking himself.
His equity in IVRCL remained the same for years—a little over 11 per cent even after the initial public offering (IPO) in 1995 or the follow-on public offer in 2005.
Today, that relatively low stake has put IVRCL at risk of being taken over by the Subhash Chandra-controlled Essel group, which today has a larger stake in IVRCL than its promoters. Essel bought 10.19 per cent stake in IVRCL by March 29, 2012. In the following week on April 2 and 3, it purchased an additional 5.5 million shares raising its stake in the roads-to-townships builder to 12.27 per cent.
By doing so, Essel has also made promoters who have low stakes in their own companies realise that nothing is a given, and that what you think is your company today could be someone else’s tomorrow.
Reddy has learnt that the hard way. With Essel stating that the acquisition "is in line with the philosophy to grow the infrastructure business" and IVRCL promoters asserting that they "will not leave the company just like that," the market is abuzz with the talk of an impending hostile takeover.
"This kind of possibility has been anticipated but we did not focus on this aspect and thought that we will see when such a thing happens," Reddy told Business Standard.
Now, a war of words has broken out amongst the two factions. Essel, in a press release today claims that “Few months back, the Essel Group was approached by investment banker(s) stating that IVRCL Ltd’s (“IVRCL”, “Company”) promoters, who hold approx. 11.2% may be interested in selling their stake in the Company. However, the indicated asking price was manifold above the then prevailing market price.”
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Reddy should have realised that Essel itself has a presence in the infrastructure sector and thus managing the company may not pose such a dilemma. Essel group company, Essel Infra, has interests in roads, power, water assets and urban infrastructure. IVRCL has expertise in most of these areas and makes itself an attractive target to Essel. Besides, Essel reportedly has deep pockets to fund the acquisition.
There’s another reason as to why Essel is keen on swallowing IVRCL. The company that takes over IVRCL will also get control over the company's other listed subsidiaries—Hindustan Dorr-Oliver (HDO) and IVRCL Assets & Holdings. IVRCL has 55.28 per cent stake in HDO and 75.72 per cent stake in IVRCL A & H.
Reddy says he is not worried about the Essel's acquisition bid. Since an open offer can be triggered only by raising the acquirer's stake to 26 per cent, he feels that Essel has a long way to go. "Why should I react now?" he said.
On the other hand, Essel is keeping its future plans close to its chest. Except stating that it has raised its holding in IVRCL, which is mandatory if the stake acquired is two per cent or more, Essel has not disclosed its intentions so far, leading to all kinds of speculations.
Market experts believe it will take some more time before clarity emerges on this front. However, one thing is clear—anyone who is set to acquire IVRCL should have the support of the institutional investors which hold nearly 43 per cent stake in the company. There were media reports that these investors may back Essel's bid for IVRCL.
Reddy dismissed these reports as mere "speculations". "No institutional investor will react at this juncture," he asserted.
IVRCL chief financial officer, K Balarami Reddy, said that none of the institutional investors had "dissatisfaction" with the present management. Hence, he was confident that they would side with the company promoters.
Yet, evidence suggests that there is sufficient reason for investors to be disenchanted. Last year, IVRCL share price declined sharply and plunged to a low of Rs 27 in December 2011 as the company was bogged down with high debt, high interest cost and a general slowdown in the infrastructure sector. In fact, the company had been looking at hiving off HDO and utilising the proceedings to retire a portion its Rs 2,400 crore debt.
Faced with declining profits, the company also embarked on a restructuring exercise in November 2011 involving merger of IVRCL A&H, which has a portfolio of nine toll roads, with itself. IVRCL also decided to exit or offer a stake in some of the toll projects by bringing in a partner. But before the merger process was completed Essel made its move and started acquiring a stake in the company.
At present, Reddy continues to be in a "wait and watch" mode. He is holding a series of internal meetings to boost the morale of his employees. Last week, he visited Mumbai and Delhi to meet the company's bankers and clients who expressed concerns over the unfolding developments.
"We are going ahead with our works. We are awaiting opening of Rs 20,000 crore of tenders that are in the pipeline," Reddy said, pointing out that the company recently bagged orders worth Rs 4,081 crore.
Essel has said that it has “decided to stay invested with its current holding of 12.27% until the general shareholder consensus or other considerations persuade Essel to intervene in the management of IVRCL for increasing the shareholders’ value.”
Essel, in its press release, claims that it will watch every move of IVRCL, especially “its intent of selling some prime assets… in which case Essel will weigh all available options including initiating relevant proceedings.”
Reddy responded by saying that everything “Essel said was "lies,” and rubbished Essel's contention that it would explore all options to prevent IVRCL from selling the company assets. "It has only 12.27 per cent stake, how can it stall us from selling assets"?, he asked adding that IVRCL has a board which has independent directors.
Far from over, it looks like the war between the two companies—which seems unlikely to be restricted to just words—has just begun.