Even as the Sensex continues to scale new peaks, a majority of mid- and small-cap stocks have barely budged in the past five years. But thanks to open offers, investors in select stocks from these categories have made a killing in the past two years. Promoters and strategic investors in 142 companies have made offers to buy out shares of other investors. We decided to look back at these offers to see how investors could have played them.
Global firms on the prowl The most prominent open offers came from multinational parents seeking to shore up stakes in their Indian arms. These stocks were not exactly cheap, to begin with, but the global giants proved quite willing to pay even more. Investors in these cases were best off tendering their holdings. The particularly savvy ones could have gained even more by selling their shares at higher prices in the secondary market.
Take the case of Anglo-Dutch consumer major Unilever offering to acquire an additional 22.5 per cent in HUL in April 2013. Unilever offered ₹600 for each share of HUL, implying a hefty 15 per cent premium to its then closing price of ₹497. The offer valued the company at over 35 times its one-year forward earnings. This was also at twice the Sensex multiple. Despite the offer being attractively priced for HUL investors, only 14.8 per cent of its public shareholders participated in the open offer, against the 22.5 per cent targeted by the parent.
But those who held on may have reason to regret it. As the company’s volume growth rates slumped over the next two quarters, the stock fell. It has lost 9 per cent since the open offer price.
In December 2013, UK-based GlaxoSmithKline Pharma made public its plans to acquire 20.6 million shares of its Indian subsidiary GSK Pharma (India) at ₹3,100 a share, a good 26 per cent premium to its then closing price. The offer price valued the stock almost 38 times its 2014 expected earnings, 30 per cent higher than its historical valuation band. Not just that, this was more than twice that of the BSE Healthcare Index. All this came at a time when the company was struggling to grow revenues and maintain margins due to price cuts in India on implementation of the new drug pricing policy. Investors who bailed out then are likely to be a happy lot today, as the stock price has plummeted 20 per cent post-offer.
The stock of glass major Saint Gobain Sekurit India is yet another instance. Saint Gobain Glass India, the promoter, made an offer to buy a 14.23 per cent stake at ₹90 a share in June 2012. This was 37 per cent higher than its last traded price. Most investors shunned the offer but were proved wrong. The stock has shed over 84 per cent in value since the open offer and now hovers at ₹14.
There’s just one takeaway for investors from such cases — if a global parent is willing to pay an exorbitant premium to prop up its stake in its Indian arm, bail out. Don’t let greed persuade you to hold on for more.
Change in management Then, there have been open offers where the acquirer has been the knight in shining armour for Indian shareholders.
A good case in point is the stock of United Spirits, which was acquired by UK brewery giant Diageo Plc.
In November 2012, when the UB group was in the throes of a debt crisis, Diageo offered to purchase over 3.7 crore shares in the flagship firm at ₹1,440 per share, after mopping up a 27.4 per cent stake from promoters and others.
The open offer price was at a meagre 6 per cent premium to its last traded price. But the change in management spurred a massive relief rally in the stock, its price zooming 27 per cent to ₹1,833 within a month of the announcement. While the induction of Diageo was good for the company, bringing in cash and product synergies, these benefits were quickly factored into the price. In the case of United Spirits, it was investors who didn’t tender to the offer who had reason to be happy. The change in management has sent the stock zooming 70 per cent from its open offer price.
In the case of Hexaware, Barings Private Equity bought out a chunky 41.8 per cent stake from promoters, made an open offer and took control of the company. The stock, helped by the change in fortunes of mid-tier IT companies, has since shot up 21 per cent from the open offer price of ₹135.
The lessons from these two offers are clear.
Where an open offer ushers in a new strategic investor who can contribute to the business, holding on may pay rich dividends. In these cases, keep a close watch on the company’s near-term growth prospects, valuations and price movement before you make a decision to participate in an open offer.
Unexpected bonanza But it was the third set of open offers that offered an unexpected bonanza to investors. While two-thirds of the open offers in this period were at a premium to the prevailing market price, the premiums were, strangely enough, highest in the case of little known illiquid stocks. Elcid Investments, Indland Printers and Ganon Trading offer the best examples of this.
Take the case of Elcid Investments, one of the promoters of paint major Asian Paints. This illiquid stock last traded at ₹2.73 in September 2011.
The company’s 2.85 per cent stake in Asian Paints alone is worth over ₹1,350 crore, leave aside its investments in other frontline stocks such as Infosys, TCS, Tata Steel, Reliance Industries and Sun Pharma that have grown multi fold. But the company’s market cap during its last trade in September 2011 was less than a crore! Its promoters made a surprise offer to buy the share at a breathtaking ₹11,455 in June 2013, offering up an unexpected windfall for the tired shareholders. Interestingly, the valuation for the offer wasn’t all that outlandish, as the company’s earnings per share were at ₹640 in 2012-13, with the last traded price at a fraction of the earnings.
Likewise, the open offer by promoters of the loss-making stationery printing company Inland Printers made in March 2013 came as a bonanza for its investors. The promoters offered to buy a 26 per cent stake in the company at ₹3 a share, at a time when the stock traded at just one paisa.
Despite the seemingly hefty premium the valuation was quite modest at less than four times its FY13 earnings.
Another stock that worked wonders for its lucky investors was that of the Mumbai-based equity trading and investment company Ganon Trading.
Its promoter, Krishnamani Holding Pvt Ltd, made an offer to acquire a 26 per cent stake in the company at a massive ₹350 a share in March 2012. The stock was then trading at just ₹1.6 on the BSE.
Similarly, investors in the stock of auto parts maker Gujarat Automotive Gears were in for a pleasant surprise when the promoters made an offer to buy 26 per cent of the company’s outstanding equity at ₹1,137 a share. The open offer price was almost six times its last traded price.
It is difficult to draw any lessons from these instances, apart from the fact that penny stocks can sometimes turn out to be lottery winners. But given that only one in about a thousand stocks will yield such a bonanza, we don’t advise that you try this open offer ‘strategy’.
Overall, the takeaways for investors from the open offers of the past two years are simple.
First, understand the fundamentals of the company. The stock price moves in tandem with the future prospects of the company. Hence, it is important to assess the ability of the company to sustain healthy growth. In the past, stock prices of companies whose financial performance deteriorated post-open offer have been hammered mercilessly.
Two, be sensitive to valuations. If an open offer comes up at a stiff premium to a stock’s historical and sector average, it may be best not to wait and use the offer to trim your exposure. By holding an overvalued stock you may run a higher risk of losing money after the offer closes.
Three, once the offer has been announced keep a close watch on the stock price in the secondary markets. Most stocks move into a premium over the offer price. This is your opportunity to get out. Selling your shares in the open market is a better proposition from a tax angle too. According to Indian tax laws, profits made through tendering a stock within a year of purchase attract short-term capital gains tax at the income slab that you fall under. But selling it in the open market will attract just 15 per cent tax.
When you sell a stock in the secondary market, it attracts no long-term capital gains tax. But gains suffer tax at 10 per cent if you tender in an open offer.
Related: Should you punt on them?