Saturday, June 14, 2008

Ranbaxy open offer is biased

So many conjectures and assumptions surrounding impending Ranbaxy open offer.

As it exists today, if you acquire 15% or more of a target company, you have to make a compulsory open offer to other investors of the company to buyout further 20% stake from them – the idea is to give those investors an exit option at the same price. But there’s a catch. While promoters can exit their entire stake, the rest of the shareholders can only exit partially – if the acquirer does not want to buyout the entire outstanding shareholders.

In the Daiichi-Sankyo acquisition of Ranbaxy, the promoters are exiting completely at a price of Rs.737/-per share for their 35% holding. Now Daiichi-Sankyo (acquirer) has to make an open offer for another 20% at or about the same price - which is at a significant premium (Rs.194 or 35.72%) to the closing price of Ranbaxy share at Rs.543/- yesterday. So if the remaining holders of [entire 65% non-promoters] tender their shares in the open offer, only 30.7% shares offered will be accepted resulting in a rejection rate of 70%.

However, the preferential issue would also play an important role as it would change the acceptance ratio. If the preferential issue is made before the open offer then the capital base would be enhanced, affecting the acceptance ratio. Open offer on current base of 373.2 million share (would) result in buyback of 74.63 million shares (30.7% acceptance) and in case of an expanded base 419.3 million (adding preferential issue of 46.26 million), it comes to 83.85 million shares (34.5% acceptance).

I imagine a "what-if" scenario. If I hold 100 shares of Ranbaxy and tender it in the open offer, only 30 shares will be accepted by Daiichi-Sankyo at Rs.737. I will be left holding the remaining 70 shares and exposing myself to vagaries of price action post open offer, which will certainly be, down. But the promoters would have made a neat exit with full premium in their pockets. How fair is that? Well, they may explain it as “control premium” – for having stuck with the company for over 75 years and having not entered or exited like ordinary investors. Still it rankles.

Why not make the acquirers make a minimum open offer to public, as far as possible, equal to the percentage of shareholding acquired from the promoters – which is 35% in this case? That would restore a semblance of fairness. [Of course subject to Listing Agreement post offer minimum public holding criteria]

To buy 100 shares today, I have to invest Rs.54,300 @ Rs.543 a share. If I tender all these shares, only 30 shares will be accepted at Rs.737, fetching me Rs.22,110. Since this is an off-market trade, I will take a short term capital gains tax knock of 30% (+ cess) on the gain (Rs.194 x 30 shares), netting me just Rs.20,306. So my net investment on the residual holding of 70 shares will be (Rs.54,300 – Rs.20,306) Rs.33,994 or Rs.485 per share. Post offer, if Ranbaxy stock price falls below Rs.485/-, the holder is incurring a net erosion in value.

Now Ranbaxy has an EPS of Rs.17.50 giving it a P/E multiple of 31 at its current price of Rs.543. Will it be sustainable post open offer in these harried times of oil price surge, global inflation and waning sentiment in our markets? When the public offer euphoria dies down, the stock will end up quoting at an average P/E of let’s say 17, the price of the Ranbaxy share will be around Rs.290/- leaving me to stare at an erosion of 47.65% in my Ranbaxy holding.

Now you know why Ranbaxy stock price is not going anywhere even after the news of its acquisition by Daiichi-Sankyo… It’s a play on capitalism again. Loaded in favor of promoters. Remember – rich getting richer…?

Readers, what do you think?
[Update : Thanks to reader Ratan for correcting me on the STCG error in the original post, that now stands revised.]


Ratan said...

There is a calculation mistake over here. The STCG tax is paid only on the short term gain which will be 0.3*30*(737-543)= 1746 (plus some educational cess on this)


Krish said...


Eagle eyes! Mea Culpa. Thanks. Error rectified.

Welcome to reader base.

Jigam said...

The open offer of Ranbaxy is not just biased , but also foul play has been play in the delay of its open offer. The notice of delay was coming in news paper & people were given impression that it will be delayed for atleast 2 weeks but at the same time informed circle were creating position in Ranbaxy septembr futures betting that offer will not be delayed for long time. and the offer came in just 4 days. People lost huge money & informed circles made windfall profit.

Anybody Listening

gidmuk said...

Excellent analysis, Krish.

I wish I had "stumbled" on it BEFORE I bought Ranbaxy shares back in June. (I bought them soon after the Daiichi announcement).

Now I'll become a "long-term investor" in Randbaxy and hope/pray that I break even... someday.

Keep up the good work!


Krish said...

Thanks Gidmuk... Welcome to reader base...