About 10 open offers have been recently announced and are yet to close, including some from big companies such as Tata Steel’s for Tinplate Company and Tata Sponge. While the poor equity market conditions have created a conducive environment for some of the promoters and large investors to increase/consolidate their stake in the target companies, some of the offers are consequent to acquisition of a controlling stake in the target company.
Notably, even after some of these stocks have run up post the offer announcement, many are still quoting below the offer price – the offer price is higher by 1-21 per cent compared to the current price, making it attractive for shareholders to tender their shares. But, should investors tender their shares? Experts believe that some open offers could provide an exit opportunity to shareholders, while some may just be an arbitrage opportunity and all offers may not necessarily be attractive. "In many cases, the price appreciation has already happened. One should look at the opportunities selectively and look for individual stories," says Arun Kejriwal of Kejriwal Research and Investment.
Acquisition-led offers
In the case of Shanthi Gears, the open offer is consequent to Tube Investments acquiring a controlling stake in the company from its earlier promoters. Given the offer price of Rs 81, analysts believe investors should tender shares from the short-term perspective to gain advantage of the aggressive price offered by the new owners.
“I think if one is holding or has bought some shares of Shanthi Gears, he/she should tender some shares, as the offer price is very attractive,” says Rajen Shah, chief investment officer, Angel Broking. The offer price translates into a premium of over 17 per cent to the market price. That difference is likely to stay till the offer closes, given that only part of the holdings will be accepted at the offer price. Investors holding 100 shares of Shanthi Gears are likely to see a maximum of about 45 shares being accepted at the offer price; the remaining, however, will be exposed to market risk.”
After the open offer closes, the share prices are expected to fall, as it has risen from about Rs 38 in mid-May to the current Rs 67. “There could be some correction but I do not think the share price will drop to below Rs 60 because of the valuations,” says Rajen Shah. Analysts also believe that as the company would now come under the new group, there could more synergies, leading to earnings accretion for Shanthi Gears in the long run.
There is one more acquisition candidate. A consortium of two Brazilian and an Australian company has made an open offer to acquire 26 per cent stake in Shree Digvijay Cement at Rs 10.94 a share. While the share price shot up even before the start of the open offer (August 14), from a valuation perspective, investors should not tender their shares.
The stock is trading at less than one times its book value, while the enterprise value per tonne (a key valuation indicator) is just $25, against the benchmark of $80-100 per tonne for small cement companies.
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Notably, Shree Digvijay is also profitable, with debt of just Rs 28 crore. Against the Rs 400 crore required for setting up a million-tonne cement plant, Digvijay is available at an enterprise value of Rs 180 crore.
| AT A PREMIUM | |||||
| Company | Starting date | Closing date | Open offer price (Rs) | Current | Premium / (Discount) (%) |
| Welspun India | 23-Jul-12 | 3-Aug-12 | 54.00 | 53.30 | 1.31 |
| Ahlcon Parenterals (India) | 31-Jul-12 | 13-Aug-12 | 460.00 | 431.00 | 6.73 |
| Tata Sponge Iron | 6-Aug-12 | 22-Aug-12 | 375.00 | 343.25 | 9.25 |
| Advik Laboratories | 8-Aug-12 | 23-Aug-12 | 5.00 | 5.47 | -8.59 |
| Shree Digvijay Cement | 14-Aug-12 | 29-Aug-12 | 10.94 | 10.65 | 2.72 |
| Shanthi Gears | 5-Sep-12 | 18-Sep-12 | 81.00 | 67.00 | 20.90 |
| Welspun Global Brands | 6-Sep-12 | 20-Sep-12 | 42.00 | 38.40 | 9.38 |
| Lloyds Steel Industries | 6-Sep-12 | 20-Sep-12 | 11.65 | 10.94 | 6.49 |
| Magnum | 7-Sep-12 | 21-Sep-12 | 6.00 | 9.96 | -39.76 |
| Tinplate Company | 7-Aug-12 | 22-Aug-12 | 60.00 | 55.50 | 8.11 |
| Premium/Discount is the difference between offer price over the current price Current price is on July 31, 12 Source: Capitaline | |||||
On the other hand, for Lloyds Steel, three companies together have made an offer for 26 per cent of emerging voting capital, after the preferential allotment at Rs 11.65 per share. As the company is loss-making and net worth was eroded significantly, existing shareholders could look at exiting the counter.
Consolidation gains
Among the big names, Tata Steel has initiated an open offer to increase stake in two of the listed group companies, namely Tinplate and Tata Sponge. Through the open offer, Tata Steel intends to increase its stake in Tata Sponge to 51 per cent and to 73 per cent in Tinplate; the Tatas currently hold 43.24 per cent and 60.96 per cent, respectively. Tata Steel aims to consolidate its positions, though the timing could also be rewarding for the latter.
“In the case of Tata Sponge and Tinplate, the price gap has already narrowed, so there is no meaning in buying shares and tendering these in the open offer. However, if one is holding the shares prior to the open offer announcement (and looking for an exit), it is prudent to sell shares in the market than tendering these in the open offer,” says Kejriwal. However, for those who intend to remain long-term investors in these companies, experts believe they can continue to hold, as both the companies have sound business prospects. And, since Tata Steel now wants to consolidate these with itself, there could be more rewards when the actual merger takes place and the final price is discovered.
In the case of Welspun India, a leading entity and exporter of home textiles, the open offer was triggered after the promoters bought about five million shares, or 5.61 per cent, at Rs 54 each. The promoters are consolidating and increasing their stake in Welspun. Analysts believe as the management is showing confidence in the company and the valuations are three times its trailing earnings, investors should remain invested.