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!