APW President - A Delisting Case

Until a few months ago, delisting was the flavour of the day. With recency bias of cases like Alfa Laval and Atlas Copco, an equation was formed.. MNC + above 75% holding = Profit guaranteed! In some cases, MNCs with less than 75% promoter holding ran up too! It makes no sense to participate in these opportunities when the crowd is running after them. Consensus is seldom right! I had written a post on this too..

However, over a period of time, the market has slowly forgotten the entire delisting theme. People no longer ask me (or give me unsolicitated khabars) about delisting. Its no more the 'in-thing'. So, its time to at least start looking into it. :-)

One such case which me and my friend Ninad discussed is that of APW President Systems Ltd. The company is now a Schneider Group company, with the promoters holding 75%. They have already announced their intention to delist.

I had earlier written about how to analyse delisting cases and what points one should consider for decision making, in my opinion. Let's try and look at APW from the delisting point of view..

1. Valuation Comfort: One of the most important criteria I look at while analysing delisting cases. If there is no valuation comfort, I would be more than ok giving the opportunity a pass. APW is available at a market cap of Rs.125 cr and an EV of about Rs.145 cr. FY12 sales were Rs.97 cr, while there was a loss of Rs.5.8 cr at the PAT level. On the face of it, the valuations look expensive. However, one should also take into account that any acquisition is usually followed by 'cleaning of books', where there will be quite some write-offs and hits on the profitability. Prior to the acquisition, however, the company had PAT of Rs.10 cr in FY09 and Rs.6 cr in FY10. The company definitely has potential, if its capacities are utilised properly, under the right set of promoters. In my view, at the current market cap, its neither too cheap, not too expensive..its somewhere in the mid-range, but still not at go-out-and-take-a-big-position valuation. Barely acceptable!
2. Management Quality: Management quality is of paramount importance. If the management is not good, the minority shareholders will not get a fair exit. Schneider Group is a global leader in the electrical parts, components and allied spaces. Based on my reading, I have not found anything blatantly wrong which the management has done in the past. I am ok with the management quality..Acceptable!
3. Incentive to delist: Why should promoters delist the company? What incentive do they have? Trying to study this will help us understand the seriousness of the promoters to delist the company. In the case of APW, the promoters have kept their holding at 75%. So, there is no legal compulsion/deadline for them to delist. However, Schneider has been on an acquisition spree in India in the recent past, snapping up one business after another.  Link to article. Most of the companies they acquired were either privately held, or they acquired the business in question, without acquiring the company. The group seems more comfy with having privately held companies. They may also be looking at APW as a low cost manufacturing base. Further, they have announced their intention to delist the company, even though it is not at all legally mandatory for them to do so. I cant conclude for sure whether there is a high incentive to delist, but one can say that there is serious intention to delist.
4. Floor Price: The company has announced Rs.164.30 as the floor price whereas the promoters have announced Rs.195 as the  indicative price for delisting. CMP of Rs.205 is about 40% above the floor and 5% above the indicative price. 
5. Shareholding pattern: A concentrated non-promoter shareholding pattern makes delisting easy since the promoters have to 'deal with' lesser number of shareholders. In this case, promoters hold 75% and need minimum 15% more to delist. Here, the facts become very interesting.

In March 2012, the shareholding was pretty concentrated, with just 4 shareholders holding 11.96%. 5 other individual shareholders held 2.42%. So, just 9 players held 14.38%. Delisting looked very much doable.

However, in the June 2012 shareholding, everybody has disappeared! Globe and Rajasthan, which are arb players are no longer there in the 1%+ category. M Rutty & Co, which was one of the erstwhile promoters have also disappeared, while APW Electro has reduced its holding. The overall shareholding has gotten a lot more dispersed in these 3 months, thereby making delisting more difficult comparatively.

Conclusion

At current market cap, APW is not a screaming buy. The promoters are not under any legal obligation to delist. So if they decide not to go ahead with the delisting, the price would correct a lot, since there are losses in the past year and the new management has not disclosed its plans for the company. Market would typically react to this in a very negative way. So, building a big position at this market cap seems very risky to me. I would like to attend the AGM of the company, to be held in September, to get more clarity on this (if possible!).

Cheers and happy investing!


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