At Thursday’s market prices, the management control of infrastructure company IVRCL will call for a war chest of Rs 700 crore. Given that both Sudhir Reddy and the Subhash Chandra-controlled Essel Group hold 11.18 per cent and 10.2 per cent, respectively, in the company, a management control would require an additional 40 per cent stake.
While a small segment of the market believes this could end up as a hostile takeover battle, a majority does not expect such an eventuality. Either of the two parties seeking management control would first need to raise their stake above 25 per cent, at which point an open offer for at least 26 per cent would be triggered. At Thursday’s closing price of Rs 64 per share, an additional 40 per cent stake would cost Rs 700 crore.
While Essel could rustle up this kind of cash, the market does not expect IVRCL’s promoter Sudhir Reddy to increase his stake substantially. Though IVRCL shares were up 7.8 per cent on Thursday, analysts don’t expect this deal to end up as a secondary market transaction. This leaves the possibility of the Essel Group increasing its stake further. This could push up the stock price in the short-term, claim analysts. Bank of America Merrill Lynch believes, given the open offer trigger at 25 per cent, further buying by Essel could take the stock above fundamental fair value on a strategic premium.
However, if either of the parties were to take the open market route to increase their stake, the company would not benefit. More importantly, nearly 43 per cent in the company is held by domestic and foreign institutions. The institutional investors will play a critical role in this battle for control, which is why the market isn’t expecting a hostile takeover battle. Since IVRCL clearly needs cash infusion, analysts expect the Essel Group to be inducted into the company as a strategic investor, which would be better than the purely financial route of private equity investment.
So far, there is no evidence that larger shareholders would oppose Essel. According to Karvy Institutional Research, institutional investors in IVRCL will support a well-diversified infrastructure group to run IVRCL, as with the mounting debt and a huge equity requirement of Rs 1,500-1,700 crore over next three years, there is no headroom to infuse funds through the equity route.
The market seems to be betting on a situation wherein Essel Group manages to influence the IVRCL board to issue preferential shares so that it becomes a promoter. This would result in the much-needed cash infusion into the company. Essel is also a player in the infrastructure space and currently has 12 road projects in the bag and joint ventures for other infrastructure forays. Analysts are not ruling out a reverse merger of Essel Infrastructure’s assets into IVRCL, too. This development could impact other infrastructure stocks, where the promoter holding is low.