Less than a fifth of all open offers since 2006 have succeeded.
Two principal arguments have been made about the Bharti-MTN deal and its eventual failure/success. The first is the issue of dual listing where Bharti and MTN can be listed on both Indian and South African stock exchanges. This is important since both companies want to remain listed on their country’s stock exchanges — however, since this opens up a potential window for capital account convertibility, the government has made it clear it isn’t going to allow it. The other argument pertains to open offers, where anyone that buys more than 15 per cent of a company has to mandatorily offer to buy at least 20 per cent of the shares of the company from the public. With Sebi now saying that even if such a transaction is conducted through GDRs instead of through direct equity shares, an open offer will have to be made. Since the original deal was to be structured using GDRs, this raises the cost of the Bharti-MTN deal for MTN and is considered a deal-breaker.
Whatever the fate of the deal, however, the open offer clause is probably not as much as a deal breaker as imagined. An analysis of the 339 open offers made from April 1, 2006 makes this clear. According to Prime Database, which has analysed all the open offers in this period, just around 60 were successful — that is, they were nearly or fully subscribed. That’s a success ratio of less than a fifth. In around a third of cases — 113 out of 339 — shareholders offered to sell more than 10 per cent of their shares as against the offer to buy 20 per cent shares (see graphic).
The reason for the low success rate is obvious: If shareholders feel the company will do better under the new owner/partner, why should they want to exit? If the Bharti-MTN deal, to use that example, allows Bharti to capture a lot of upside, considering that Africa is one of the few places, other than India, where the telecom market is still expanding at a rapid pace, why should shareholders exit? Unless, of course, they feel the price being paid by Bharti for the MTN stake is too high.
A good example to keep in mind is that of Maruti Udyog Limited. When the government wanted to sell the company to Suzuki Motors of Japan several years ago, it wanted a price that was significantly higher than what Suzuki could pay — in other words, it was a deal breaker. The deal that was struck, however, saw Suzuki paying a ‘control premium’ to the government for a part of its stake (that resulted in Suzuki getting majority control of the company) and offering to guarantee the public sale of the rest — the country’s investing public, however, thought the share was a steal, so the government got a good value for its remaining stake and Suzuki didn’t have to shell out any more money either.
While the Prime Database numbers indicate it is not automatically true that the Bharti-MTN deal will become more expensive even if an open offer has to be made, there are some caveats. While the overall data shows there is less than a one in five chance of the open offer being fully subscribed, it is equally true that some of the well-known mergers in recent times have had their open offers fully subscribed. So, when Cadila Healthcare bought Carnation Nutra-Analogue Foods in May 2006 and made an open offer to buy 20 per cent of the Carnation shares, this offer was fully subscribed. Ditto for Mahindra & Mahindra’s purchase of Punjab Tractors in May 2007; for Kingfisher’s takeover of Deccan Aviation in December 2007; Prannoy and Radhika Roy’s open offer for NDTV in May 2008 was also fully subscribed; Idea Cellular’s takeover of Spice Communications in September 2008 was nearly fully subscribed (it got an offer to buy 18.9 per cent of shares as compared to the offer of 20 per cent), the list goes on.
One explanation for this, of course, is that the shareholders of the target company didn’t feel there was that much scope for prices to rise anymore, at least in the short run. There is, however, another explanation, and that is in the case where the offer price was higher than the market price of the target company, especially towards the end of the offer period, the open offer got fully or nearly fully subscribed.
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In the case of Pfizer Limited which was acquired by its parent in June 2009, the offer price of Rs 830 per share was higher than the market price for most of the three-week offer period. It was only for a few days when the market price was higher — on the last day of the offer, the market price was just Rs 802. Not surprisingly, Pfizer got to buy 29.5 per cent of its shares as compared to 33.8 per cent it wanted to acquire. When Idea Cellular bought Spice Communications in September 2008, the open offer price of Rs 77.3 was pretty close to market price — towards the end of the offer period, however, the market price of Spice fell to just Rs 46.25 and Idea got to buy 18.9 per cent of Spice’s shares. In the Kingfisher-Deccan deal in September 2007, the offer price of Rs 155 per Deccan share was always higher than Deccan’s market price which was in the low- and mid-140s through much of the period. When BASF tried to buy Ciba India in June this year, however, the offer price of Rs 237.13 was, for a long time, much lower than the market price — it is true the market price slipped below the offer price by June 15, but investors must have felt this was an unnatural movement, and the total shares offered to BASF totalled just a little over 2 per cent Ciba’s total shareholdings.
If the Bharti-MTN deal goes into extended time, as looked likely when this piece was written, one of the factors it will have to keep in mind is the timing of the deal — if the open offer price is lower than the then market price or very close to it, the chances of MTN having to pay large sums for the open offer are much lower. Assuming, of course, that Bharti’s shareholders are as bullish on the deal as Sunil Mittal is.