Saturday, December 15, 2012

Marg Ltd Open Offer - a lose-lose situation

Marg Ltd (BSE 530543) is a Chennai based infrastructure company. About an year ago, the company had announced a voluntary open offer to acquire 20% of the shares of the company at Rs.91 per share. However, SEBI detected violations of the takeover code in the same and investigations started. This article will make the background of the case pretty clear.

Well, today SEBI has directed the promoters of Marg to revise the open offer price to Rs.340 per share! Article This consists of the 'proper' open offer price of Rs.216, plus interest of Rs.124. The market price of the company's shares was Rs.50 yesterday and the open offer price is more than 6 times the current market price! Promoters hold 54% in the company. Seems like a sweet deal. Well, the market participants have also given its thumbs-up to this development, the stock was up 6% today.

Click to enlarge

I also got quite a lot of emails, pointing out the clear-cut arbitrage available here. Buy the shares at CMP of Rs.53, tender them in the open offer at Rs.340. Even if there is a 50% acceptance, thats big money! How I wish it were that simple. 

Please consider the following points, before rushing to place your 'buy' order..
  • The promoters of the company have fought tooth-and-nail with SEBI against this open offer. They have shown no intention or willingness to go for this open offer.
  • They have already announced that they will be appealing against this SEBI order before the Securities Appellate Tribunal (SAT). 
  • Now typically, it takes 2-3 years for SAT to arrive at a decision. If the decision goes in favour of SEBI, the promoters have the option to appeal to the Supreme Court (which I think they surely will).
  • Now, cases in the Supreme Court routinely last for more than 5 years very easily. Cases like those of DISA have been left hanging and there are others which are in process for more than that! 
  • Till the time the final decision of the Supreme Court comes, the promoters have no need to make an open offer. (In fact, even after a Supreme Court decision, the promoters have the option to appeal to a bigger bench of the Honourable Court). 
  • So, lets say 2 years at the SAT and 5 years at the Supreme Court (I am always an optimist!)..this open offer issue will drag on for at least 7-8 years, before a final judgement is given or the promoters settle out of court. (The second option appears very difficult)

So, I think there is a high probability that this open offer will remain open for a long loooonnnggg time! 

Are you comfortable holding this stock for, lets say, a decade, waiting for the open offer? One should do proper fundamental analysis and determine the company's value to decide on this front. However, in my humble opinion, the words 'fundamental analysis', 'value' and 'Marg Ltd' should not be used in the same sentence!! :-)

I am very sure that I will be more than happy to give this situation a 100% pass. Muzhe iss Marg pe nahi chalna hai!

If you are thinking of getting into this one, its my request to please think twice, take some rest and then think twice again!

Cheers and happy investing!!

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Rohit Chauhan said...

beware of anything which is too good to be true 20% returns per month :)
this offer seems like that.

Vidyanshu Pandey said...

Hi Neeraj,

I saw this open offer and I was struck by that sentence too - that promoters are going to appeal. Did not take the thought flow to its logical conclusion like you have done here. I agree with you that its safe to wait and see whether this is indeed an "arbitrage" worth participating.

Best, Vidyanshu.

Dhaval Parikh said...

Hi neeraj regarding this point made by you. (In fact, even after a Supreme Court decision, the promoters have the option to appeal to a bigger bench of the Honourable Court).

I am not sure if they can appeal to some other court even after supreme court decision. Can you give me one such example where such thing has happened?


Anil Kumar Tulsiram said...

Good one

Such cases remind me to Prof Sanjay Bakshi favorite metaphor "picking up pennies in front of a steamroller.” So better to stay away from these sort of companies...

Neeraj Marathe said...

Hello Dhaval,
I am not a lawyer, but as per my understanding, in cases of interpretation of constitution etc, such an appeal can be made. In recent times, the Vodafone case is being referred to a larger bench of the Supreme Court, after the Supreme Court's decision last year.
However, that is a long long long time away. I do not think there is any merit in talking about that at present..

Anonymous said...

Acutally, the market has given a big thumbs down to the development with the stock dropping by over 25%since the news came out last week. Also, I think SAT takes considerable less than 2-3 years. Not sure why you say you can't analyze the company fundamentally. A lot of value investors started out as investors in distressed situations like these. I think serious investors will do the valuation work before accepting or rejecting the idea.

Neeraj Marathe said...

Thnx for you comment Anon. Valid points, i think.

Narayanan said...

The promoters cannot afford to buy shares at this price. As far as this transaction is concerned they are as good as insolvent. Even the current holding is pledged. So no question of buying back.
Have you looked at Wheels India BTW? The stock seems to have gone berserk for what seems to be the wrong reasons.

Anonymous said...

Narayanan - the only way out for the promoter is to buy time and hope for the stock to go above the open offer price...

Neeraj Marathe said...

Hello Narayanan,
Sorry, i have not looked at Wheels India.

Anonymous said...

What about a company that's trading .1 times Sales. A 1000 crore + subsidiary (Karaikal Port), where Marg Ltd holds 70 % (with a solid PE investment) wont the PE want to list the entity at a higher valuation ?

Marg's market cap today is 200 crores. It holds about 1800 acres of land, 5-7 educational institutes , 3000 crore order book for EPC .

Why should this buy back really determine the price of the stock ? there are fundamentals behind this scrip. Plus, if the promoters are ready to buy @ 91, then why shouldn't we consider buying at 51 ? Would love to hear back from you .

Neeraj Marathe said...

Sorry Anon,
I do not find this company worth looking into as an investment. Questionable promoters, opaque accounting and multiple SPVs etc, no cash generation, tremendous debt..all in all something i would give a pass. i am quite ok with missing the opportunity here, if any..anyway, my post was only about the open offer.

Dhaval Parikh said...

Hi Neeraj

Thanks for the reply. That was just for knowledge purpose and not actually meant specifically for marg. Vodafone is a special case but in my opinion I do not think they can go beyond supreme court (Again I am not a lawyer) but I have exp with such companies. NE wys thanks for the view and I agree with all the points made by you. Also one more thing that the promoters are still solving the fund raising issue. If you see their pledged shares are being invoked and is as low as 25k shares which is not a good thing

Sachin said...

Hi Anonymous,

Their are lots of ' Anonymous' user !!! So my reply is for 'December 19, 2012 11:13 PM' comment.

As per Warren Buffet 'it is better to buy a great business at a fair price than a fair one at great price.'
If you think Marg Ltd is a great business which also includes management integrity then yes go for it.

Dhaval Parikh said...

Hi Neeraj, The SC outcome is out and it clearly states that the promoters will need to give open offer as per the price dediced by SEBI. So how what are the views on the same?

Neeraj Marathe said...

Hi Dhaval,
Sorry, but i havnt been tracking Marg at all, so need to read it first to develop a view.

Neeraj Marathe said...

Hi Dhaval,
Sorry, but i havnt been tracking Marg at all, so need to read it first to develop a view.

Ramneek said...

Any comments now Neeraj?

Neeraj Marathe said...

Well, nothing to add really..