DELISTING - NOT THE BEST THEME TO PLAY ON

By Ruma Dubey

A lot of market punters are pretty miffed because Kennametal let them down so badly. Most had taken positions in the stock, hoping that the company will announce a delisting price which would be at a hefty premium over the market price. And then the company went ahead and announced that it will not delist; the US parent company has instead, taken the cheaper route – to pare its stake from the current 88.16% to 75%. Marketmen are crying foul, as though the company had reneged on its delisting plan and now the blame game has started, finding a scapegoat to hang the putrefied fruits of their losses on any neck which stuck out to advice a play on the delisting theme. But in their pursuit for quick gains, greed probably deafened many to the various words of caution given and most did not read the current ongoing trend in the market.

Honeywell was one such company which despite having announced that it had no plans to delist, punters accumulated on delisting hopes. Gammon Infra went in for a bonus issue to reduce stake. Fresenius Kabi promoters announced a stake sale. But then you have a Chettinad Cement announcing plans to delist. And the savoury taste of delisting of Thomas Cook continues to linger on the lips and that has now got bitter due to Kennametal. Other “success” delisting stories of – Alfa Laval, Patni Computer, UTV Software Communications, Carol Info Service and Exedy India have also raised hopes. .

Delisting has become much more expensive than earlier and promoters have got wary. But this delisting, a win-win for the investor is proving to be quite expensive for the companies. Naturally when the floor price is based on reverse book building, the cost shoots through the roof.  This means, companies to delist now have to fork up much more than earlier and thus sometimes, delisting no longer remains an affordable option. For eg: iGate Corp said that it is unlikely to be able to delist Patni Computer anytime soon because the high share price will make a buyback too expensive. In November’11, iGATE said it would seek to buy Patni's shares for a minimum of Rs. 356.74/share when the stock price, at that time was at Rs.388.65. It had allocated $215 million for the delisting. Post the delisting news, the stock hit a new high at Rs.502.15. iGate did not want to pay more than Rs.450/share but eventually they had to fork out Rs.520/share, much higher than the Rs.503/share paid by iGate to acquire Patni’s stake.

In Jan 2011, delisting plans of Kennametal hit a roadblock after shareholders rejected the company's share buyback proposal. It had planned to acquire the shares through purchase of 11.84% public stake or 26 lakh outstanding shares for Rs.514.98 a share. Its ten years accumulated net profit is at Rs.343 crore and to buy back at Rs.514.98/ share, it would have required Rs.133.89 crore. BOC and Goodyear India, did not tender the required number of shares in the respective open offers, while promoters of Bosch Chasis did not accept the price discovered through the reverse book-building system. AstraZeneca too is another such case waiting to happen though its promoters have refuted delisting plans; they hold 90% stake.

Remember Saint Gobain? Its buyback offer to delist its Indian arm failed where due to high valuations it was not be able to garner enough shares. Fresenius Kabi delisting too failed due to very high valuations and thus its promoters have gone in for stake sale. With control now in the hands of the shareholders, expectations have shot through the roof and the feeling is that promoters will delist at any price. But if greed runs too high, promoters are now being forced to look at other alternatives to meet the 75% compliance.  

And as an investor, what should one do? Do not buy shares only because it is a delisting candidate, pay attention to its fundamentals also. It is best to now go by individual companies, try to find out if the promoters had clearly issued denials for delisting. Taking a blanket call on all companies with more than 75% stake and then hinging on delisting would be imprudent.

There is no set formula which will tell you whether or not the company will opt for delisting. One cannot assume that because a company is doing very well in India and has invested a lot, will decide not to delist. If that was the case, Cadbury should never have delisted in 2003.

And if you think you have made good money and the stock is touching new highs on expectations, sell and make the most of the ‘delisting’ buzz.  If delisting does get announced, you may not lose much as you have sold at a high but if delisting is scuttled and promoters opt to bring their holding, then you will lose much more than what you could have gained.

Greed is the root of all evil, blinding one’s senses to logical thinking. So keep a control on greed (not saying eradicate greed) and that could probably reduce your travails as an impudent trader.