PARTY AS PARENTAL CONTROL GOES UP!

By Ruma Dubey

Last week, the news of GSK Pharma’s parent in London wanting to hike its stake from the present 50.7% to 75% sent the stock price into the stratosphere as the open offer price was at Rs.3100/share. Apart from offering a huge premium on the market price, the open offer put to rest, once and for all, any rumours of delisting. The company’s increased commitment was good news, especially when majority are opting for delisting.

Suddenly now from a theme of delisting, marketmen are scouting around for stocks where now parents could announce a stake hike and like GSK, come up with a premium open offer price. Delisting as such has become a dicey story to play on. Delisting has become much more expensive than earlier and promoters have got wary, what with the price needed to pay becoming exorbitant. 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. There are scores of such examples abound. So in delisting, when the company cancels its plans to delist due to the price, investors entering on this theme, remain stuck. Saint Gobain is one such example and so is Kennametal.

Thus in these times, the sure shot open offer price, when at a premium is a much better deal. It also means that unlike delisting, the promoters are happy to be in India and stay listed, allowing their books to be scrutinized. It is a reiteration of faith in the country. And that’s most certainly, morally, a much better theme to play on.

RBI recently allowed foreign promoters to hike stake without taking RBI consent. This is like a big cut through the thick and long red tape and it is likely that more and more ‘parent’ companies could announce a stake hike.

In Nov’12, the same parent company, Glaxosmithkline Pte  increased its stake in GSK Consumer from 43.2% to 72.46%  at a price of Rs.3900 per share. Then on July’13, we had Unilever hiking its stake in HUL from 52.48% to 67.28%.  Not just MNCs, even Indian parent companies sometimes hike stake. Like the most recent from Tata Steel, which made an open offer to hike its stake in Tinplate Company of India and Tata Sponge to 75% and 54.5% respectively. After  GSK Pharma announcement, people have started playing on this lucrative story but the moot question is – is it worth it?

Most certainly it’s worth it, retail investors should make the most of this opportunity and here are some of the reasons for the same:

• Unlike delisting, open offer for stake hike does not alter the business model.
• Listed MNCs raise the bar of corporate governance, adding depth to the market.
• The stock gets better valued as parent MNC stake goes up and higher stake means higher commitment.
• You can get the arbitrage opportunity only when the gap between the market price and open offer price is high. But as the offer draws to an end, the gap closes and most of the times, later, the stock price slides. Thus make the best of it before, just after announcement of open offer and till mid of the offer; after that price will head southwards.
• An open offer does not mean that there will suddenly be a sea change in the way in which the company is managed; the core business will remain the same and so will all other things. So do not expect spurt in revenue and profits just because the parent company has hiked stake. The stock price thus post the offer, has to find its true valuation as per the existing business model.
• Also, many a cases, it is seen that MNCs hike stake to eventually delist. Walt Disney- UTV did exactly that. So you can make profit now on the open offer deal and then when the price cools off, stay invested – as such MNCs are sound investments and if delisting happens, you could once again make money.

Thus if you are now planning to play on this theme, which are the companies to look out for?

Well, essentially MNCs which are doing well and time and again have reiterated through their actions and sometimes, verbally, that they do not plan on delisting. And high on this list is Colgate-Palmolive, where parent currents holds 51% stake. Then there is Castrol India with 71.03% stake, Suzuki in Maruti holds 56.21% stake. Watch out for Cummins India, Bata, P&G, Nestle, Bosch India, Bayer Crop, Crisil and even ACC-Ambuja.