Open offer season

Most offers are at a substantial premium

There has been a flurry of activity in open offers lately. Most offers, made both by existing promoters as well as those taking over a company, have been made at a premium to the three-month average stock price prior to the respective announcements.

Take Thomas Cook India, which has been recently acquired by Dubai Financial LLC, the open offer for domestic shareholders at Rs 619.45 is at a premium of almost 15 per cent to the three-month average stock price prior to this announcement.

In fact, this offer is at a premium of almost 5.5 per cent to the current market price of Rs 587, and it does indicate that the new promoters are confident of aggressively growing earnings of Thomas Cook, thanks to the current boom in the tourism industry.

Meanwhile, the promoter group of Unitech has made an open offer to acquire an additional 14.41 per cent stake in the company. The promoters' stake at the end of the September 2005 quarter was 60.48 per cent.

The open offer at Rs 895 per share is at a premium of almost 24.4 per cent to the three-month average stock price prior to the announcement.

However, the open offer is at a discount of almost 9.2 per cent to the current market price of Rs 977 and that's because the stock has run up almost 50 per cent over the past month.

It does appear that the buoyant conditions in the property and infrastructure sector have made investors hopeful of an upward revision in the offer price by the promoters.

The smallest premium, in terms of the open offer price and the three-month average stock price prior to the announcement, has been made by the French promoters of FCI OEN Connectors.

At an open offer price of Rs 405, it is at a mere one per cent premium to the average price prior to the announcement and the current market price.

Analysts highlight that while the company has been focussing on expanding its exports to its overseas parent, profit growth in the next few years is not expected to be aggressive as these overseas exports are at a fixed transfer price.

The French promoters held a 67.83 per cent stake in September 2005 and they want to ramp it up by 20 per cent via this offer.

Technology takes the M&A route

Along with good growth in revenues and profits, the domestic tech sector spread its wings wider in 2005 as several companies announced acquisitions abroad.

This will be a continuing trend in 2006, as the top-tier companies like TCS and Wipro will pursue the acquisition route to gain clients, capabilities or expand geographies. On the other hand, Infosys is expected to grow organically.

The top companies are pursuing multi-million, multi-year deals to ensure volume growth, and expect more such deals to come their way.

After the five-year $400-million ABN Amro contract, which went to five companies including Infosys and TCS, there were expectations that there would be more such deals though not as large, but no large contracts fructified.

Indian companies have a proven track record, and since offshoring has become more mainstream, some large deals are expected to come through this year. General Motors is expected to outsource multi-year $2 billion contracts in 2006.

Analysts estimate the size of the opportunity at $40 billion as new contracts from global corporations are coming up for fresh bids.

For the top-tier companies there are challenges. Growth in their large clients has more-or-less plateaued in the past few quarters and they need to expand their service offerings to gain more business from the same clients. Cross-selling services is also going to be another area that can improve topline growth.

On the other hand, the gap between the second-tier and the top-tier companies is only widening. Except for a few niche players, smaller companies are facing scale issues and cannot offer a wider array of services.

According to analysts, there will be consolidation in this spacen in the new year and these companies are also expected to pursue the M&A route to grow.

Tech stocks have outperformed the Sensex in the past quarter, and though valuations are not cheap, they are likely to remain as firm in 2006.