MNCs looking at easy ways to reduce stake: Edelweiss

The German parent of Blue Dart Express recently announced dilution of its stake to comply with the SEBI norms on minimum public shareholding. Given that the SEBI has been very aggressive to the deadline of the 75:25 ratio of the promoter-to-public stake, more companies are looking at an easier way to reduce stake.

Yogesh Radke, Senior Manager, Institutional Equities - Quantitative Research Desk, Edelweiss is of the opinion that most MNCs still prefer delisting. However, high valuations are making them think whether it is a better option to delist themselves by giving a hefty premium for a small stake. After Fresenius Kabi and Blue Dart, who have announced for the dilution of equity, many other MNCs also may think about dilution as an option rather than delisting.
Radke suggests that SEBI should consider a staggered approach to reducing equity. "It's difficult in such an environment where the valuations have gone up on the back of the expectation of delisting and the recent delistings. Companies have to shell out a huge premium to delist themselves. Whenever they announce a dilution of equity, stocks tank down by 30-40%. Diluting the equity at a lower level is also not a viable option for these promoters. So, there has to be a mechanism where you don't force even the management to do a hefty premium delisting and dilution at a lower base but gradually every quarter, the company can reduce the holding. That would be a much viable option rather than the current one." Here is the edited transcript of the interview on CNBC-TV18. Q: Was the street expecting a delisting rather than what the Blue Dart parent had to disclose yesterday?
A: After the first announcement from the Fresenius Kabi Oncology, the announcement of the dilution of equity, there was some amount of scepticism in the delisting stocks, and Blue Dart was the second jerk. The sentiment in the delisting stocks has slightly gone down. Most of the stocks have been trading at the high valuations only on the back of the delisting stories.
A couple of delisting stocks like Atlas Copco and Alfa Laval have had very high valuations. The momentum in these stocks has broken down. Given that the SEBI has now been very aggressive to the deadline of the 75%-25% ratio of the promoter-to-public, more companies are looking at an easier way; instead of delisting, dilution is an easier method for them. But even dilution of equity at a high valuation is very difficult. Q: What is leading to this kind of approach from the multinational companies? Do you think prices have gone up in the local market that parent companies do not want to buyback at those prices? Is it something else which is making them consider selling stake to pare their shareholding down rather than take the stock out?
A: Most of the MNCs would still prefer delisting. However, high valuations are making them also think about whether it is a better option to delist themselves from the exchanges by giving a hefty premium for a small stake, which is left on the board. After Fresenius Kabi and Blue Dart, who have announced for the dilution of equity, many other MNCs also may think about dilution as an option rather than delisting. Q: Can you name a few stocks where the street has priced in some expectations of an eventual delisting where stock prices may now begin to correct after seeing the Fresenius and the Blue Dart experience?
A: I will not mention about whether stocks may correct or not, that’s surely the sentiments of the investors because it's not only the delisting story, it’s also the companies which have been doing well. They will continue to perform well even if the delisting does not happen or dilution happens. But there are a couple of companies right from BOC, Goodyear and many other MNC companies where people expected delisting.
SEBI has mandated that till June 2013 all companies have to comply with the 75-25% ratio. It's very difficult to get everything done on a deadline day. If companies have to reduce their equity holding every quarter or every year and they have to show that they have been reducing then that would have been a much better approach rather than giving one deadline. Because on the deadline day, there will be many other companies not complying with the norms and you may find again the deadline getting extended from 2013-2015.
This is not a current issue. It started in 2006. They revised in 2008 then 2010 and now it’s 2013. There is a probability of this getting revised again as most of the companies don’t comply with the norms which have been suggested by SEBI. My suggestion would be that if SEBI were to check the shareholdings and see that the promoters are at least diluting certain percentage of their equity, they will achieve the 75:25 ratio norm towards a certain date.
It’s difficult in such an environment where the valuations have gone up on the back of the expectation of delisting and the recent delistings, which have happened. Companies have to shell out a huge premium to delist themselves. Whenever they announce a dilution of equity, stocks tank down by 30-40%.
Diluting the equity at a lower level is also not a viable option for these promoters. So, there has to be a mechanism where you don’t force even the management to do a hefty premium delisting and dilution at a lower base but gradually every quarter, the company can reduce the holding. That would be a much viable option rather than current one.