S&P: Hit or miss

S&P's fresh offer for Crisil is the carrot, but there's also a stick

One of the problems with a conditional offer, especially one as large as Standard & Poor's (S&P) to Crisil shareholders, is that the offeror has to target not just the average shareholder, but the marginal and reluctant one.

That's seen from the upward revision in S&P's offer from Rs 680 to Rs 775 a share. Of course, the stock had already run up above the Rs 680 offer price.

Should Crisil shareholders take up the offer? The straightforward way to look at it is that the Rs 775 per share offer is very generous "" the scrip was quoting at around the Rs 550 level when news of the Rs 680 per share offer broke.

But if the price is the carrot, the conditional offer is also a stick "" if investors don't sell and S&P doesn't garner at least 41.5 per cent additional shareholding, the offer falls through. S&P has already said that at Rs 775 the scrip "is more than fully priced".

If the offer fails, S&P's shareholding will remain at its current 9.5 per cent, interest in the scrip will die down, and the run-up in the stock on account of the open offer is likely to reverse. In the worst case, unable to gain control, S&P may even decide to exit.

There's also the problem that, for larger shareholders, (and there are many large and institutional investors in Crisil), the paltry volumes in the stock will make exit difficult.

What if S&P gets the minimum 41.5 per cent it needs or thereabouts but doesn't get more than that? Even if that happens and the stock acquires the "MNC" label, it's already richly valued.

And with creeping acquisition limited to 55 per cent, there's no upside. More importantly, if every investor decides to hold his shares back in the hope that others will accept the offer and make it a success, there's always the risk that the offer may fall through.

Hind Lever

Hindustan Lever is following Tata Tea's footsteps by hiving off its tea gardens. To be sure, Tata Tea hasn't let go its Assam estates, and HLL is merely transferring the gardens to a subsidiary, but there's no question, as the HLL press release points out, that there's very little synergy between the plantations and the packet tea business.

Plantations have an interest in getting the maximum price for the tea they produce, while the packet tea companies have an interest in getting the right quality of tea at the lowest possible price. In short, the two are very different businesses.

The difference is compounded by the fact that the wage and staff welfare costs of plantations are very high. In HLL's case, for instance, the Doom Dooma Dooma and Tea Estates division together account for 12,400 employees of HLL's total staff strength of 36,500.

That's a proportion far in excess of the contribution of the two divisions to HLL's total turnover. Doom Dooma has been making operating losses, while Tea Estates made a marginal profit in 2004.

To put it bluntly, the plantations are a drag on the company. Add to that the political hassles of operating in insurgent-rife Assam, and the brew looks decidedly unpalatable.

True, plantations have a garden equity of their own, with teas from some gardens, such as Castleton, developing into brands in their own right.

But most tea estates don't fall into that category. The same considerations that made HLL decide to try and form joint ventures for their plantations will weigh with prospective buyers as well, which may not like to be saddled with the burden of running plantations.

In short, while HLL is attempting to unlock value, finding a buyer to turn the key may not be easy. The market echoed that sentiment, with the HLL stock falling more than the market on Monday.

Mastek

Mastek announced its third quarter results ended March 2005 almost exactly in line with the guidance given by it at the end of the previous quarter. Total revenues were Rs 150.1 crore, at the higher end of the Rs 145-150 crore revenues guidance given. Net profit stood at Rs 13.76 crore, the mid-point of the Rs 13.25-14.25 crore earnings guidance. Given Mastek's erratic performance as far as guidance goes, this is a welcome change.

Revenue growth was 6.4 per cent on a quarter-on-quarter basis last quarter, slightly lower than the 8.3 per cent growth recorded in the December quarter. One of the reasons for the drop in growth rate was a 4.8 per cent decline in revenues from the US.

Besides, revenues of the Mastek-Deloitte JV, DCOTG, rose just 2.6 per cent. Mastek's performance in the US continues to be a concern - revenues from this region accounted for just 14.4 per cent of revenues last quarter, a huge drop from the 24.7 per cent levels in the last financial year.

Operating margin fell 200 basis points to 14.4 last quarter. Much of the fall was on account of a one-off expense at DCOTG, but even after adjusting for it, overall margins would be down by over 100 basis points. One of the reasons Mastek was able to achieve its earnings target was an 80 per cent jump in other income to Rs 2.63 crore.

Apart from Mastek's dismal performance in the US, some of the old worries continue to resurface. Its reliance on a top few customers has got worse.

A year ago, the company's top 10 customers accounted for 66 per cent of revenues and currently just the top five account for 65 per cent of revenues. This is probably the reason Mastek trades at less than 10 times estimated earnings for the year ended June 2005.

With contribution by Mobis Philipose