10 yrs after failed bid, Damani's VST stake worth Rs 520 cr

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10 yrs after failed bid, Damani's VST stake worth Rs 520 cr

In February 2001, Radhakishan Damani, counted among India's savviest stock market investors, stunned the market by making a hostile bid for VST Industries, owned by British American Tobacco (BAT).

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Santosh Nair
Moneycontrol.com

In February 2001, Radhakishan Damani, counted among India's savviest stock market investors, stunned the market by making a hostile bid for cigarette maker VST Industries, owned by British American Tobacco (BAT). Through his investment arm Bright Star Investments, Damani had by then accumulated a shade below 15% in the company over the last year at an average price of Rs 88 per share. He was now willing to pay Rs 112 per share for an additional 20% in the company, a 26% to the market price on the day he announced the bid. Even Damani's closest associates were surprised by this act of aggression, completely at odds with his soft-spoken and reclusive nature.

A messy bidding war ensued, as ITC-with tacit support from BAT-entered the fray to thwart Damani from taking control of VST. And it soon became evident that there were far too many obstacles-regulatory and cultural-for Damani to be able to walk away with his much-coveted prize. ITC initially made an open offer at Rs 115 per share and later increased that to Rs 126 per share. Bright Star eventually raised the price and size of its bid-Rs 151 per share for 30% of the company-but failed to win over banks, insurance companies and financial institutions which together held 22% in the company. Through the open offer, Bright Star managed to increase its stake to around 20%, but Damani's dream to own a controlling stake in VST remained just that, a dream.

Ten years on, RK Damani has every reason to feel satisfied, as long as he does not let his pride come in the way. VST shares hit a record high of Rs 1350 this morning, valuing Bright Star's investment in the company (25.95% as on June 30, 2011) at over Rs 520 crore. That is almost a 15-fold return from the time Damani first started accumulating the shares way back in 2000. Some can argue that there are enough stocks that have given better returns. Fair point. But here is what makes Damani one of the best value investors in living memory.

According to a back-of-the-envelope calculation, the acquisition cost of VST shares for Bright Star is less than zero, considering the hefty dividend pay-outs over the last nine years.

Between July 2002 and July 2011, Bright Star has pocketed Rs 71.36 crore through annual dividends ranging between 45-450%. Bright Star's first 15% in VST cost it around Rs 20 crore (average price of Rs 88), and the next 5% (assuming the open offer price of Rs 151 and some open market purchases) would have cost around Rs 11 crore. Between March 2003 and March 2005, Bright Star added another 4% when the stock price ranged between Rs 90-350. Even assuming an average price of Rs 275, that stake would have cost not more than Rs 20 crore. The last tranche of roughly 2% was purchased between March 2007 and March 2009, when the price was declining and ranged between Rs 350 and 210 (the high during the period being Rs 450). That would have cost not more than Rs 10-12 crore, even assuming an average price in excess of Rs 300.

In summary, Damani's Bright Star is unlikely to have forked out more than Rs 63 crore for the 25.95% stake that it is currently holding. And dividends alone have netted over Rs 71 crore over the years.