How to play buybacks, open offers?

Special situations, that�s the issue experts are discussing. It is not just about the stocks that you buy and invest in, sometimes there are developments on the stock because of which, you need to take the call on whether or not you should be invested or it is time to exit that stock.

Buybacks, open offers, delisting very often in the case of many global MNC, what does that constitute and how does an investor take a studied call on whether or not they should tender or exit as the case maybe or actually stay invested? In an interview with CNBC-TV18�s Mitali Mukherjee, Yogesh Radke, head-quantitative research, Edelweiss Securities and SP Tulsian, sptulsian.com, answer those questions. Below is the transcript of the interview. Also watch the accompanying videos. Q: A buyback by a company. What does it constitute and what is the intent behind doing that? Tulsian: Buyback by the company is generally made with three objectives; first, to increase the shareholder value, two, to increase the promoter shareholding and third, to make use of the surplus cash lying with the company. This is made by the company with a view to ultimately extinguish the shares, which the company has purchased, resulting into the reduction in the share capital. So, if the paid up capital of the company gets reduced, obviously the earning per share (EPS), book value and the other return on share parameters get improved. Often, this method is largely used by the company more as a gimmick to mop-up the share prices. Q: A lot of time it�s seen and called as a confidence building mechanism. How exactly does that happen for someone who is holding share in that particular company? Tulsian: Generally, this window remains open for about one year. One needs to carefully watch whether this results into a fruitful or a positive or a constructive exercise or not. There have been many instances where the window has remained opened for one year, the share was ruling below the price at which company intent to buy in spite of not a single share has been bought. Obviously, you cannot paint all with the same brush. But, if a company is sincere, the promoters are sincere and if it results into the positive move on those lines, definitely that results into the accretion in the value of the shareholders. Q: Let�s take a couple of examples over here and try and understand how you should gauge whether or not you should be participating in that buyback. Reliance Infra is a largecap company which is a case in point, there is Piramal as well. How do you go about gauging the value of the business, the future value of the business and whether this is a good price to be giving back at? Radke: You have to bifurcate buyback into two types of buybacks; one, the buyback which the company does by buying the shares from the market and second, is a tender offer. Recently, Piramal announced a buyback which was a tender offer, where shareholders can tender their shares and on a proportionate basis they get accepted. So that is something which an investor can play to get the benefit of a buyback. In the other one, the company buys from the market. So, in this, the shareholder does not know at what time, at what price the company is going to buy because this is something which has been mentioned before that it is one year process, two year process and across the prices the company buys it. So, the benefit for a shareholder who wants to participate in a buyback is only when the company announces a tender offer, buyback via tender offer. Historically, we have seen few instances where the buyback is via tender offer. Normally, all the buybacks are done via market which does not directly benefit the investor or trader, but company�s equity base, performance base parameters get improved. So, whenever there is a buyback via tender offer that is something where traders can make money or trade on those opportunities. Q: Walk us through a couple of key things to do then. Over the next month or so for buybacks that are currently open for companies, just lineout a few of them and how you would go about approaching the process? Radke: As I mentioned that if the buyback is via tender offer then we can play for something again. But currently there is no buyback which is a tender offer. All the buybacks are via market. That means you cannot tender your shares and get the price at which the company is buying. The company will buy through the market. So, you cannot take the benefit of a normal buyback. You need a tender offer, which I just explained, Piramal Healthcare where the buyback was at Rs 600, when the share price was trading at Rs 450. At that time, you can buy the shares and tender into the buyback. So, you get a benefit of that. All the buybacks which are going on, running in the market don�t provide you an opportunity to make money or trade in the market. These are only for the performance improvement of the companies. _PAGEBREAK_ Q: The greater juice or interest is often in cases where your company is looking to delist and hence that buyback is happening. How do you play cases like that? Why is it that it happens more often in many global MNCs, which is why you tend to track promoter holding and the mother company�s holding in a company and then categorise it as a possible buyback or delisting candidate? Tulsian: That is right. The major juice or the major benefit for the minority or the small shareholders lies in a complete delisting move, which we generally see getting initiated by the multinational companies. Multinational companies have two advantages; first, they have a positive view on the India, while we maybe the analyst or the retail shareholders may not have that kind of view on the stock, particularly of that company in which we are invested or which we are analyzing. Two, they are not comfortable with the compliance part. They say that they are not very comfortable going by the quarterly compliance, though they have the compliance in their country also. Thirdly, this is more as a policy. If you see the policy of three M, they maybe having presence in about 80-90 countries, but they have 100% shareholding in more than 75 countries that is hardly three-four countries they have diluted their stake which they regret now and try to rectify. So, largely this is happening by the multinational companies because of their financial strength, their positive view on the India. Thirdly, they want to skip the part, which they find sometimes as redundant or more as a burden on them. Generally, wherever we see the promoter stake moving in a range of about more than 75% to as high as 90%, multinationals are not comfortable because as per the recent guidelines, all the promoters need to bring down their shareholding to the level of 75%, within next couple of years and they are not comfortable. Even if they are holding 80% rather they would opt to increase it to 100% via delisting instead of reducing it back to 75%. So, these are the circumstances, which are forcing or encouraging or tempting the multinational companies to go for delisting. Always we have seen the appreciation going as high as 30% to 60-70-80%, whenever these kind of moves have been initiated. As you have rightly said, all these things seem to be coming more in case of the multinational companies. Q: You have a list of potential delisting candidates names like BOC, Alfa Laval, just walk us through that list. How you have collated the holding and why it could stand to be one of the delisting candidates? Radke: Tulsian mentioned rightly that these are most of the MNC companies who wants their equity back because they see that rather diluting their equity, it is better to accumulate back the entire quantity. So, surely the sorting out criteria is highly dependent on the parent company, the MNC companies, promoter holding should be above 75% or 80% range. They have shown signs of accumulating equity. If an MNC company is doing a buyback that means it is reducing its equity from the market. Or something like a prior open offer, which has been given which were best standing at 50% holding and after the open offer, they increased their holding to 70%. So that is showing a sign or the tendency of that MNC company to accumulate the shares. So, on the basis of historical moves, we can point out that which stocks would be the stocks which can announce delisting of their stocks. So, on that basis, you can accumulate. Even performance of the stock, even after the market corrects, these stocks where the delisting buzz is going on, they don�t correct a lot. Q: ABB and Siemens, what happened over there? How does one take a studied call on whether or not this is the right price for the stock? Tulsian: There are two methods, whenever we see the buying by the promoters, either they increase their stakes to 75%. In both, the companies ABB and Siemens, the promoters had a stake close to about 52-55% and they thought to raise it to 75%. Sometimes, we analyst see this as a precursor for the promoters that maybe in next couple of years we may see a complete delisting or maybe complete buyout by these promoters. So, both the companies have first gone for raising their stake in the company to 75%. In such cases, the onus or the calculation lies upon these promoters, they take a calculative call, they give you a price, infact there are no obligation on them to raise the price beyond the price, which they have given or any compulsion on them to accept the stocks. Even if it doesn�t go through, it doesn�t harm anyone. So, I don�t think that the shareholders have any choice in these cases where they can impress upon the promoters to raise the price at which they have offered to buy from the minority shareholder. If you are comfortable that you want to tender those shares at the given price, one should tender. Generally, we have seen that the kind of prices given by these promoters or the multinational companies could be higher by about 20-25%. So, it has always been found advisable or profitable for the minority shareholders to tender those shares. Second, a complete buyout and there the leeway or the room lies with the institutional investors or the minority shareholders, those who have a reasonable stake in the company, there they can tender the share at a higher price. Infact they can compel the promoters to go for the delisting at a much higher price than the floor price, which they have given or which they have indicated if they are serious. So, these are the two instances of buying the shares by the promoters from the small shareholders. _PAGEBREAK_ Q: The one that gets the stock excited though is the open offer issue, what triggers that off? Tulsian: Open offer happens in three cases; one, a complete sell out by the promoter, which we have seen in case of Andhra Paper. If that happens at a very high price, the open offer obviously comes at the same level. But sometimes we go gang-ho and we think that probably the kind of consideration, which has been paid by the purchaser, is going to remain the share price even post open offer. And there we make the mistakes. So, one should be very calculative that what will be the share price at which it will effectively rule post open offer. And that is where the calculation game or the true valuation of the company lies or has to be taken by the small shareholders or by the analysts. In case of Andhra Paper, though the open offer came at Rs 545, it was expected that it will rule post open offer maybe at about Rs 200-220. So, there was no justification for the stock to go beyond Rs 375 to Rs 400. Second, we see the joint promoter coming in, which we have seen in case of Everonn where the SKIL Infrastructure Ltd have acquired the equal stake in the company. But since the stake has been acquired at less than the prevailing market price because post this news, share short up by about 20%, so there was no juice left. The open offer price came merely as a statutory compliance at much lower rate than the prevailing market price. So, that remains more as a paper formality. Third, whenever a strategic or a financial investor acquires more than 15% because 15% triggers for all these two situations, joint promoter as well as for strategic investor. If they acquire 15%, they have to give in open offer, which we have seen in case of Bombay Rayon. Generally, it happens at a market price. So, we don�t see much of the benefit flowing to the small shareholders, except in the case of the complete buyout as we have stated in case of Andhra Paper, while it has not been seen so profitable in case of Everonn. Infact in case of Everonn, it was a non-event, there was no participation by the minority shareholders. In case of even Bombay Rayon, things were not too excited for the small shareholders. So, these are the three situations in which the open offer occurs. Q: How have you approached some of these recent open offers, what has the recommendation been there for investors or shareholders? Radke: BRFL is one of the open offer which is yet opened and share prices are just near to the open offer price. The process may take around three months. So, there is not much of spread to be made at present. But whenever the spread is higher, you can buy from the market and tender into the offer depending on the breakeven point where the shares may trade after the open offer. Q: While making these calculations on open offers, aside from the technicals and the acceptance ratio, do you also take into account what the future earnings potential of that company might be and whether it makes sense to stay invested purely because this is the company that can deliver exponential earnings and hence a much higher share price? Radke: A very classical example is about the Cairn open offer. The open offer has been for a long time there and that is the reason that shares have not moved above the open offer price significantly. Cairn is a pure crude play. So, if we consider that if there was no open offer, the stock could have rallied up much farther than here. But obvious that post open offer, the stock will come out of the hangover of the open offer. The stock may start performing in line with the crude prices or the fundamentals. So, at that time also, you can accumulate the shares to play post open offer game that is something like crude play in Cairn or in Patni case, you can play for business revaluation with iGate coming into the picture. So, even if open offer play has been over, you can play for the stock performance because the hangover has been off of open offer. Q: The tricky one lately has been the one where the promoter sells a part of the business. So, there is no stake sale particularly, but the core of the business sometimes goes out. So, the retail investors is not left with much option in terms of whether they have to tender or not, but they do have to take that decision on whether this is a company or a stock they want to remain invested in, Kanoria Chemicals is an example over there. How do you approach these kinds of stories? Tulsian: By and large, I will call them as fraud or maybe cheating with the minority shareholders because there have been many instances, Kanoria Chemicals, Smartlink, Borosil Glass and to some extent even Piramal Glass. In these cases, we have seen their 70% to 90% of the core business getting sold. The existing promoters they don�t mind paying the tax which runs to the extent of about 30% on the capital gain which they make. Instead of avoiding the tax by selling entire company and go for the open offer, they opt in fact to pay the tax and deprive the minority shareholders to take advantage of that on the pretext that they will take care of this money for their future course of expansion and all that. There are many companies. I blatantly call them as cheating or fraud with the minority shareholders by these promoters.