Shareholders of auto components maker Federal Mogul Goetze (FMG), the Indian arm of US-based MNC Federal Mogul, have raised a concern over the open offer price offered by the company’s new owner Tenneco Inc.

Activist investor Carl Icahn-owned Federal Mogul in the US was sold to Tenneco in a $5.4-billion deal this year, which triggered an open offer for the Indian subsidiary too. Tennneco offered ₹400 a share to acquire over 1.39 crore shares or 25 per cent stake in the Indian company. Shareholders say that ₹400 a share is just the value of a 50-acre parcel of land that FMG owns in Bengaluru, and Tenneco was taking other assets and the rest of the business operations for free.

BusinesssLine has reviewed the letters written by shareholders and investor associations to SEBI and the government. In fact, a letter with BusinessLine shows that the government has asked SEBI to look into the matter.

Based on ‘SEBI rules’

According to the acquirer on behalf of Tenneco, the open offer price was fixed based on simple SEBI rules considering parameters such as book value, comparable trading multiples and such other key statistics. FMG is an illiquid counter which is not traded frequently due to low floating stock. Promoters, the US parent owns 75 per cent stake, while a major portion of the remaining 25 per cent is held by mutual funds and LIC.

In such a case where the shares are not frequently traded, the above-mentioned criteria is followed by companies to determine the open offer price as the market share may not reflect a true picture. But such simplistic view is skewed against the interest minority shareholders, experts say. In the case of FMG, which has a total market-cap of ₹2,307 crore at the current share price of ₹414 on the BSE, its single land parcel in Bengaluru is valued at more than ₹2,600 crore at ₹11,000 a square feet.

Criteria questioned

“In such a case, how can a simplistic formula of valuing companies, like the above-mentioned criteria for companies whose shares are not traded frequently, work?” shareholders have asked in their letters to SEBI and the government.

“In case of Federal Mogul, the application of the SEBI formula for determining the open offer price is not fair,” JN Gupta, Founder, Shareholder Empowerment Services, said. “Even if you just look at the volume weighted average price for the past one year from when the deal announcement was made, it comes to ₹529.64 and the same for 60 days comes to ₹518.03. So, how can an open offer for ₹400 be justified.”

It was found in some of the disclosures that peer group valuation method was used to value FMG, wherein it was compared with SMKRG Pistons and Rings. Shareholders say this is unfair and argue that FMG paid a royalty of ₹28 crore to its US parent, which was 2.1 per cent of its revenues and 22 per cent of its profit after tax. Compared to that, the cost incurred by the two companies is way lower than FMG, and hence, the comparison should be made with leaders such as Bosch and Timken that have many more similarities.

The most recent case where SEBI directed the acquirer to up the open offer price substantially was that of Essar Oil, as it was disclosed later that the deal value of its merger with a Russian company was higher than its valuation made for the open offer. Another case is that of Bombay Oxygen Corp where investors have been waiting for over two decades now for an open offer and the Finance Ministry has asked SEBI to look into the matter. Certain agreements between the German company Griesheim, Goyal Gases of Delhi and the promoters of BOCL triggered open offers on several occasions, which are yet to be made.

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