Tuesday, April 5, 2011

Playing delisting cases..

Hello and wish you all a happy new financial year!
I had recently participated in the Binani Cement delisting, earning around 10% in 3 months. I was very happy and was dancing all over the place, until Atlas Copco happened. I decided to give it a pass and it is now part of my long and illustrious list of opportunity losses! (Copco returns have been much much higher than Binani)
Well, the purpose of this post is to pen down my thought process for participating in delisting cases. I hope to fine tune it, as always..

The basics

  • In order to delist the company from the exchanges, the promoters must follow the reverse book building process, at the end of which they must fulfill two conditions; they must hold more than 90% of the shares and they must buy out more than 50% of the non-promoter shareholding through the reverse book building route.
  • Just to give an example, if a promoter holds 85% of the shares, he must be able to buy 5% to take his stake to 90%. However, the second condition states that he should buy 50% of the non-promoter holding, which is 7.5% (50% of 15%). Hence, just 5% wont do, he should buy at least 7.5% stake through the reverse book building route in order to successfully delist the company.

Parameters involved

While looking at delisting opportunities, I typically look at the following parameters:

  1. Valuation comfort: This is probably the most important parameter I look at. Most important for me because I am quite fattu when it comes to investing! I always look at the possible downside. If there is no valuation comfort and delisting fails, the downside could be very high. Therefore, I usually do not participate in cases where there is no valuation comfort at CMP unless other parameters over-rule it!
  2. Management quality: Will the management be fair?! That too, in India! :-) Most of them are not. Where the management quality is extremely questionable, delisting could be a very unfair affair for the minority. Better to stay away.
  3. Incentive to delist: Why should the promoters go through all the trouble to delist? How would they benefit? If there is high incentive for them to delist, they will do it by hook or crook. They will do it even if they have to be generous to the minority! If there is no incentive, there is high probability that delisting might fail. So trying to figure out the promoters' thought process is very important.
  4. Floor price: Applicable in case where the reverse book building has already started/has been announced. Floor price is the minimum price indicated by the promoters, which they would be ready to pay to the minority, for delisting. Buying the stock close to floor price, subject to other parameters, is extremely cool!
  5. Shareholding pattern: Who are the minority? Are there any 1% plus holders? Are there professional investors who hold large chunk of shares? In cases where the non-promoter shareholding is concentrated, delisting becomes relatively easy. Also, if professional investors hold decent chunk of shares, the possibility of promoters doing funny business gets reduced to some extent.
For me, participating in delisting cases is a combination of the above parameters. Of course, it is extremely relative and the importance to be given to each parameter changes on a case to case basis. Let me just tabulate three recent cases, on the basis of the above parameters:


Out of the above, I participated in the Binani Cement delisting. I am currently looking at Goodyear India Ltd as another possible favourable delisting case.

Comments and suggestions are most welcome..

Cheers and happy investing!

20 comments:

Janak Naik said...

Nirajbhai,

Thanks for sharing this information.

Janak.

Neeraj Marathe said...

Most welcome Janakbhai..
Cheers!
Neeraj

Rayhaan said...

Hey dude, the 2008 a.r. of tf was tempting indeed...;p and maybe one of my (subconcious) reasons to invest...lol(yeah ,i was younger and even more naive than now. Hopefully,i have progressed). Anyways, you must have read prof.bakshi's piramal thesis...really feel like loading up on it..really hard to kill this idea,any suggestions? (read forseeable risks?). Any thoughts on dhandapani or money matters? Please have a look at todays post on rakesh jhunjhunwala at frankly speaking blog. Some small and microcaps look interesting on a statistical basis -teesta agro(mkt cap-6 crore,cash and fixed deposit-19 crore approx plus land.also PROFIT BROUGHT FORWARD of 9 crores,in short a mediocre fertilizer FAMILY controlled company wich is quite cheap on a Net asset value basis), ceejay finance(p/e ratio -3,quite stagnant top and bottomline ,p/bv of .45 and div yield of 7%,has some politician on board) and tcfc finance(div yield-7%,discount to nav of 50% approx,in short sort of like a cheap closed ended mutual fund,this is an investment co. Like hb capital and hb portfolio ,but looks like this one has better promoters),would love to hear your views. Thanks for todays checklist on delisting,it seems like someone is in the same school of thought as ninad kunder and rohit. Btw saw ur previous posts,bio green's a.r.is now available on the bse site,looks like an awsum spinoff, wot do u think? Eagerly awaiting ur views on accounting red flags. P.s u dnt blog very frequently do u?

Neeraj Marathe said...

Hi Rayhaan,
Nice to hear from u..u r literally brimming wid ideas and are amazingly enthu..gotta sit wid u for a drink sometime :)
Regarding Piramal, a few reservations i have:
1) has ajay piramal done anythn special or has he grown wid the sector? are Piramal healthcare's CAGRs better than the Lupins of the world? a pessimist will point out that if AP has not made a mistake so far and has done gr8, the time is ripe for him to go wrong now!!
2) why was Piramal life spun off? and inspite of it being spun off, why does piramal healthcare continue to provide it money?
3) U and i are great at investing (lets assume so!)..wud we be great at running a, lets say, liquor busines? similarly, AP could be gr8 wid pharma..but will he be gr8 in real estate or education or any other business?
4) the residual business is loss making still..
5) most importantly, for me, i do not understand pharma! out of my circle of (in)competence! :-)

i am in touch with Rohit and Ninad..Ninad, being in India, is a good frnd..both have awesome thought process..
Money matters is too risky for my appetite..
I usually do not look at NBFCs..too many unknown factors which can spoil the party..better adding them to my list of opportunity losses!
Regarding Teesta, i gotta chk it out..there seems to be some dilution, but gotta see..
And ya man, i dont blog quite a lot..i work and i also teach..so time is less..plus theres nothn much to say most of the times! :-)
Cheers!
Neeraj

SV said...

i would like to ask how do u conclude upon the mgmt quality.. i mean what all u factor in..

Neeraj Marathe said...

Hello SV,
Mgmt quality can be clearly judged by looking at the mgmt's actions in the past. Reading last 5-6 years' ARs gives lotsa info. One shud see how they have behaved with minority. Have they been honest when it comes to business? What have the done in other group companies? Have they pilfered money from the company? have they woven tall stories in the past, which cud not be fulfilled?
Usually this gives u a decent idea bout the quality of mgmt.

Robin Thomas said...

Hey Neeraj
I also had participated in the Binani Delisting, but could not make much returns (due to problems of mine), but did not lose money (which is better!!). I came across your blog while I was reading around about Binani delisting. Coincidentally I had written almost the same analysis in my blog (very newly started) at http://thomasrobin.wordpress.com/.
Do visit and provide your valuable comments.
I havent done much there, but plan to accelerate once I am done with my CFA in June.

Neeraj Marathe said...

Interesting blog Robin,
Btw, i am also tracking SEAMEC..
cheers!
Neeraj

Joe said...

Pardon my ignorance...but wasn't the Goodyear Delisting attempt a failure? Or has this been revived?

Joe

Neeraj Marathe said...

Hi Joe,
There is absolutely no ignorance on your part..
what u r sayin is 100% right..
cheers!
Neeraj

excel_monkey said...

Hi Naeeraj,

I would say you were lucky with Binani (bought at right level)

if someone would have bought just after the open offer announcement

most probably would have at the best made no money or even would have lost money.

Regards,
Excel

Neeraj Marathe said...

LOL..
thnx for the feedback Excel!
cheers!
Neeraj

investment ideas from kukkuji said...

Neeraj ji, good attempt for presentation.

only time factor is the issue. if company gives dividend , expectation on delisting may go up.

i have kept my expectations low.

cheers

discl i continue to hold the stock.

Neeraj Marathe said...

Thnx Kukkuji,
Nice to hear from u..
cheers!
Neeraj

Dayanand Deshpande said...

I earned both in Binani as well as Atlas..however my big money is stuck with Suashish diamonds. can you elaborate more on this company..
thanks in advance,
Dayanand Deshpande,
Pune.

Neeraj Marathe said...

Hello Dnyanesh,
After seeing some basic, elementary stuff, i wont be holding Suashish..also, i have not seen or analysed it in detail..so cant comment much on it..sorry..
cheers!
Neeraj

sukhbinder said...

Hi Neeraj,

What are your vies on this recent news of delisting of Alfa Laval (India) Ltd.

Is it worth looking into?

Neeraj Marathe said...

Hi Sukhbindar,
Yes, Alfa Laval is definitely worth looking into. The valuations are not that cheap and if u see the price rise in the last few months, the mkt has correctly anticipated this delisting. However, given the recent Copco ka delisting, the market will surely expect great things here and the price movement could very well happen..Approaching this more as a short term punt makes more sense at this point of time, where a huge portfolio allocation shud not be made.
Lets also wait for their announcement and try and judge their intentions..
Again, i think that fast price movement could happen, so your buying/selling decision making here shud be fast..
cheers!
Neeraj

sukhbinder said...

Thanks Neeraj for the reply. I saw the price movement and gave it a pass.

Thanks for sharing your view. Love your blog. Always learning something.. :)

Neeraj Marathe said...

Most welcome Sukhbinder,
But plz do keep tabs on the developments in Alfa Laval..i think its not worth discarding totally.. the parent could easily pay much high price..delisting here would require a small amount for them, compared with their size globally..
cheers!
Neeraj