Delisting a case study

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Ashish Kila IIF Meet, 1st Oct 2011

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Acknowledgements.
Mentors/Friends who have helped shaped my thought process regarding delisting Prof. Bakshi Ankur Romil

Neeraj
Ninad Rohit Ambar

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Road Map
What is Delisting Why Delisting Now Delisting Regulations / Process Evaluation of Delisting as an investment opportunity Delisting candidates Current Delistings going on Delisting Idea @ Timken India

What is Delisting?
Permanent removal of securities of a listed company from a stock exchange.

As a consequence of delisting, the securities of that company would no longer be tradable at that stock exchange.

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Why everyone is talking about Delisting

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Why Delisting Now

Most important Reason .a deadline The Union Finance Ministry came out with the "minimum public shareholding guidelines" on June 4, 2010, which were later revised on August 9, 2010 PSUs are expected to maintain minimum public shareholding of 10 per cent within a period of three years. And, for the private sector, it shall be 25 per cent over three years. That is, companies have time till June 3, 2013 to comply with this requirement.

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Why Delisting Nowother reasons

Lenient FDI norms and removal of sector caps No need for funds/capital markets access Strategic move for greater independence and lower costs. Depressed market conditions.

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Types of Delisting

Voluntary delisting from all the exchanges. Voluntary delisting from few exchanges but remains listed on at least one stock exchange having nation wide terminals

Exit opportunity

Compulsory Delisting
Delisting Voluntary delisting

No exit opportunity

Small Company (whether listed at any of the Exchanges)

No Bidding, but exit opportunity is there

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Voluntary Delisting Regulations

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Delisting Not Allowed in Following Cases

Pursuant to a buy back of equity shares by the company; Pursuant to a preferential allotment made by the company; Unless a period of three years has elapsed since the listing of that class of equity shares on any recognised stock exchange; or

If any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding.
No promoter shall directly or indirectly employ the funds of the company to finance an exit opportunity Home

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Delisting Process
Board of Directors approves delisting Company seeks shareholder approval for delisting the shares using postal ballot. Only the public shareholders can participate and votes in favour of delisting must be atleast two times those against. In-principle application to stock exchange for delisting, which will be disposed off by stock exchange in 30 days Competition Commission Approval Public Announcement
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Competition Commission Approval

Approval required from 1 June 2011, CCI will reply within 180 days of the filing of notice by the companies. Applicable Either, in India, the assets > Rs 1000cr or turnover > Rs 3000 cr; or in India or outside India, Assets > $500m, including at least Rs 500 cr in India, or Home turnover > $1500mn including at least Rs 1500 cr in India

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Conditions required before making PA

Receipt of in-principle approval for delisting from the recognised stock exchange

Appointment a merchant banker

Promoter shall open an escrow account and deposit therein the total estimated amount of consideration calculated on the basis of floor price and number of equity shares outstanding with public shareholders

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Delisting Offer
The date of opening of the offer shall not be later than fifty five working days from the date of the public announcement.

The offer shall remain open for a minimum period of three working days and a maximum period of five working days,
A promoter or a person acting in concert with any of the promoters shall not make a bid in the offer

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Floor Price frequently traded shares

Floor price is the minimum price indicated by the promoters, which they would be ready to pay to the minority, for delisting.

The floor price shall not be less than the

average of the weekly high and low of the closing prices of the equity shares of the company during the twenty six weeks or two weeks preceding the date on which the recognised stock exchanges were notified of the board meeting in which the delisting proposal was considered, whichever is higher Home

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Floor Price Infrequently traded shares e.g. Alfa Laval

Annualised trading turnover in such shares during last 6 months, is less than five per cent of the total listed equity shares

Floor price shall be determined by the promoter and the merchant banker taking into account the following factors:
(a) the highest price paid by the promoter for acquisitions, during last 26 weeks upto the date of the public announcement; and, (b) other parameters including return on net worth, book value of the shares of the company, earning per share, price earning multiple vis--vis the industry average.
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Requirements
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; 1. They must hold more than 90% of the shares. 2. They must buy out more than 50% of the non promoter shareholding through the reverse book building route (calculated before delisting offer)

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Indicative Offer Price

Price indicated by Management as the fair price for the investors to bid in reverse book building

The effect is that such price becomes effectively the new floor like in case of Binani, Atlas Copco etc.

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Discovered Price
The final offer price shall be determined as the price at which the maximum number of equity shares is tendered by the public shareholders. The promoter may, if he deems fit, fix a higher final price. E.g. Atlas Copco The promoter shall not be bound to accept the equity shares at the offer price determined by the reverse book building process.

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Delisting Process
The company launches reverse book building to discover the price at which it can buy the required outstanding shares.

The company has to make the final application to the stock exchange within one year of passing of the special resolution thru postall ballot
Shares not tendered/accepted in bidding period can be tendered till atleast one year from the date of delisting

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Regulations
Within eight working days of closure of the offer, the promoter and the merchant banker shall make a public announcement regarding: (i) the success of the offer alongwith the final price accepted by the acquirer; or (ii) the failure of the offer or (iii) rejection Final payment or/& return of shares where bids not accepted within ten working days from the closure of the offer.

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Some Important Points

Bids can be withdrawn or revised upwards only till one day before the closing date

Book closes till 5:30-6 pm in the evening, though official time is 3 pm atlas copco at 3pm was 49.3%
Price will move closer to the price of delisting price barring interest rate and transaction costs

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How to evaluate delisting as an investment opportunity

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Parameters/Risks Involved
Price Risk Valuation Comfort Deal Risk Management Quality MNC Parentage Cues from Prior Corporate Actions Health of Parent/ Balance Sheet strength Incentive to Delist Floor Price

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Parameters/Risks Involved
Deal Risk (contd) Shareholding Pattern Pattern delistable Some public shareholding should be required eg binani case Holding cost of >1% shareholders Insider selling during delisting (e.g. UTV) Time Risk

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Valuation Comfort
This is probably the most important parameter to look at. If there is no valuation comfort and delisting fails, the downside could be very high. Blue Dart Current P/E is ~40 & P/Sales is >3 Saint Gobain Sekurit India Company has just 90 cr capital invested with an annual sale of <100 cr and hardly any profits to show

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Management Quality Seek for cases with MNC Parentage

Will the management be fair? 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 Suashish Diamonds Promoter holding 89.43% - Floor Price 220, rejected the discovered reverse book building price of Rs. 320 in May10, Deutsche is stuck with its >3% stake in co. Compact Disk Delisting 24.7% promoter holding and announcing delisting, ultimately got shelved off because of HSBC filing debt recovery suit.
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Cues from Prior History of Corporate Actions

Management aggressiveness to Delist and indication of premium they will pay, if they decide to try delisting again

Blue Dart In 2006, Blue Darts promoter didnt accept the Reverse Book Building price of 950.
Disa India In 2007, the discovered price of Rs 2690 was rejected by the management. Bosch Chassis in Mar 2008, management rejected discovered price of Rs 750 against floor set of 415 Rs. In Aug 2008, it was successful in delisting at 600 Rs.

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Prior History of Corporate Actions

Public/Institutional holders intentions Kennametal India shareholders rejected the postal ballot conducted in Jan11. AstraZeneca Pharma shareholders rejected the postal ballot conducted Sep10. Dispersed Shareholding BOC shareholders didnt tender the required number of shares in Jan11. Goodyear India shareholders didnt get the required number of shares in May-June 10.
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Parents Health
Ability to pay Health of parent balance sheet e.g. Esab India parent company Charter International Plc is facing tough times due to fierce competition from rivals and is unlikely to make a bid for delisting

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Incentive to Delist
Globally what is parents other subsidiaries structure. Honeywell Only Indian Subsidiary listed worldwide

Their Focus on India Goodyear global investor presentation projects China as the next big destination & says nothing about India.
Whether they are focussing on India through unlisted subsidiary Saint Gobain 100% unlisted subsidiary Saint Gobain Glass India with over Rs 978 cr of sh capital, 1210 cr of sales and 208 cr of profit. Listed company the company has hardly invested 90 cr of capital and does a business of less than 100 crs

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Incentive to Delist
Blue Dart Spate of fellow subsidiaries, which sport such names of DHL Express (India) Pvt Ltd, DHL Lemuir Logistics Pvt Ltd, and Skyline Air Logistics Limited. All incorporated in India Operating in the India orbit Similar line of business that Blue Dart is in Goodyear South Asia Timken India

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Floor Price
Applicable in case where the reverse book building has already started/has been announced.

Binani Cement had set the floor price set was Rs. 82 which was below the recent buyback at Rs. 90 in which some shares were tendered by the firm.

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Share Holding 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. Easy Patterns Blue Dart promoters are required to buy back at least 9.5% of total shares, 14.3% shares is held by Institutions & Corporate Bodies. Tough ones Alfa Laval

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Insider Selling.
UTV Some insider selling before the result of postal ballot 1st view they dont think postal ballot will be cleared 2nd view they need money to utilise their ESOPs

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Time Risk
Presence of ESOPs like in case of HSBC investdirect/ UTV HSBC initiated delisting on June 16 2009 SEBI amendment saying all convertible securities need to be extinguished Process almost took 10 months

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Legal Loopholes

Cookson Plc, the parent of metallurgical chemicals maker Foseco India, Gifted 11.48% of Foseco India stake to Karibu Holdings UK, bringing its stake down to 75% to comply with Indian listing norms, it said in one of its result filings. Current position Legally debatable and certainly not in the spirit of the law

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Delisting Tax Treatment

STT is not applicable, so in the case of individuals and investing companies. Special rate of 15% on share term cap gain tax and exemption on long term cap gain tax will not apply. Short term Capital gains will be treated as normal business income and taxed as per your present tax slab. Long term will be taxed at 10% without indexation and 20% with indexation.

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List of delisting companies

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Sh holding pattern easy but companies have denied delisting

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Sh holding pattern easy but valuations on higher side.

Oracle a ray of hope . From 2011 SEC filing- As the majority shareholder of Oracle Financial Services Software Limited, a publicly traded Indian software company focused on the banking industry, we are faced with several additional risks, including being subject to local securities regulations and being unable to exert full control Home

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Valuations very expensive.

Share holding pattern very difficult.

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List of delisting candidates with some issues.

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List of delisting candidates with reasonable valuations and share holding pattern doable.

Timken

Honeywell

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Current delisting going on

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Saint Gobain
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Saint Gobain Sh. Holding Pattern - Doable

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Alfa Laval
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Alfa Laval Sh. Holding Pattern - Difficult

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UTV Delisting.
UTV CMP 950, Indicative Offer Price 1000 Expectation of some premium Promoter Ronnie to be paid at the price discovered in Reverse Book building Last open offer by Disney at Rs 860 in 2008 Risk Valuations expensive Time Risk High, due to presence of ESOPs, Postal ballot passed

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UTV Sh.Holding Pattern No Problem

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Exedy Delisting.
Exedy CMP 206, Indicative Offer Price 178.5, Floor 141.36 Last open offer by Exedy at Rs 178.5 Postal ballot passed Risk Valuations expensive as loss making entity Time Risk Standard

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Exedy Sh holding pattern doable.

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Delisting Idea Timken

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Timken India.
Valuation Comfort Performance is improving but still expensive

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Timken India.
Global experience Annual report shows List of subsidiaries showing ~69 subsidiaries worldwide out of which only 2 of them incl India are listed Ward timken (Chairman Timken Global) talks about delisting or diluting its stake- Apr 11, 2011 Very bullish on India and China growth story Concern Have an Indian Subsidiary & new major investments through it 200 cr in near future.. Current paid up capital 96 cr In Listed entity 63.7 cr
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Sh Holding Pattern
80.02% holding - so out of the balance open offer of 19.98, they will require to get atleast 50% i.e. 9.99% 4.72% with Institutions 1.57% body corporates 0.64% individuals holding >1 lakh Rs ignoring 0.19 held by NRI's - they can mop up - 6.93% from smart investors out of the balance 12.86% (held by public <1 lakh) +.19 clearing members - 13.05% - they require 23% tender to get balance 3.06% HDFC, DSP Blackrock (acquisition price ~175 in nov-dec 2010) and UTI are invested
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Funds avg cost >170

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Account wise breakup

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What if you dont wish to participate in delisting

Exit thereafter is normally a problem Management might not offer the same price it did in delisting Cadburys has initiated compulsory buy back minority shareholders fighting it out The last offer price by Cadbury 1900 Rs is much above Rs 500 being offered during delisting

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For any unanswered questions You can reach me on

ASHISHKILA@Gmail.com +91-9999751327