Not only are stock prices down between 50-80% - many companies today are quoting below their replacement costs. Seems to me like it's a good time then to go private. If only it were that easy. Our delisting laws are so antiquated -that delisting is near impossible as Isha Dalal is about to point out.
Essar Shipping, Essar Steel, Blue Dart, Astra Zeneca, SKF India, iGate, Ingersoll Rand, Balsara Hygiene - they all tried it, but only three succeeded. Getting off the exchange is tougher than getting on in India. So what if falling stock prices are luring companies to go private instead?
TV Raghunath, Head-M&A, Kotak Investment Banking says, �If the capital markets are down as they are today clearly, an exit at these prices and at a premium to the current prices is a good option for the exiting shareholders to use. And for the promoters, it�s a good price to buy. So from an economic equation standpoint it�s a very opportune time. The question that will determine whether it�s successful is a function of two things- how the promoter gets liquidity cause he has to finally cut a check to the shareholders and at what price the delisting price gets discovered, what is the exit price which is discovered.�
And that exit price doesn�t always lead to an exit door for companies, thanks to the reverse book-building process in SEBI�s 2003 Delisting Guidelines. In reverse book building - the promoter quotes a floor price to buy out shareholders. Shareholders can in turn quote prices at which they are willing to tender their shares.
The price at which the highest number of shares are tendered in, becomes the discovered delisting price.
Cyril Shroff, Managing Partner, Amarchand Mangaldas which can work in an adverse way if one shareholder decides to skew the process by bidding fairly high. It has resulted in a situation where this is so artificial that the book building price is 2-3 times the market value which makes it completely uneconomical for an acquirer to delist at such a phenomenal premium to the market price.
That's what happened to Pharmaceutical company Astra Zeneca, which went through one of the country�s very first reverse book building processes in 2004!
The company�s shareholders discovered a price of 3000 rupees per share for delisting, compared to the promoter floor price of Rs 825. That was a premium of 260% to the company's then prevailing stock price!
More recently, in 2007, logistics company DHL made a delisting offer to shareholders of its Indian subsidiary Blue Dart at a floor 10% higher than the market price-but that wasn�t good enough for DHL shareholders, who demanded a 72% premium. Needless to say - neither of these offers went through.
In times like these - it's even more unlikely that promoters will be willing cough up big premiums, or any premium at all. There's no going private, till reverse bookbuilding is well, reversed.
Cyril Shroff, Managing Partner, Amarchand Mangaldas says, �The pricing formula needs a fundamental relook. And until it is combined with some fair transparent way of bidding process, it should be linked with the market price. It can be at a premium to the market price. You can fix even artificially 25% 50% whatever as a regulation can be prescribed as a premium above market price so that there is an inbuilt element ot enable an acquirer to go ahead.�
Price is one big problem, response is the other. The guidelines require almost every shareholder to play along. For larger companies, 90% of stock has to be acquired by the promoter, whereas a 75% acquisition is mandatory for smaller companies to delist. All this right at the reverse bookbuilding stage or else the offer fails.
Investment Banker Sourav Mallik says, �To get a retail shareholder into a trading terminal and get them to upload their bid has always been the challenge. so when you had a threshold as high as 90% which meant that you have get a significant portion of the retail shareholders to the trading desk, that become a challenge.�
This challenge is exactly why Essar Shipping�s 2007 delisting offer wasn�t smooth sailing.
The company fell short of the delisting threshold by 15% and the offer sank.
Cyril Shroff, Managing Partner, Amarchand Mangaldas says, �Main reason why offers have been failing is that they have been unable to get the required quantity and meet the SEBI and stock exchange regulations in terms of the minimum number that they need. Like in your example, they keep falling short of the higher number. The quantitative number is too high.�
And even if that high threshold is reached-the battle isn�t quite won. Once the company delists at say, a 90% threshold, what about the remaining 10%. No regulation forces them to sell or squeezes them out!
So promoters may pay the price, get the response and yet never own 100% of their companies.
Cyril Shroff, Managing Partner, Amarchand Mangaldas says, �The lacuna in India is because of the lack of a squeeze out. Once you give this sort of ability for sellers to fix a high price, logically it should be accompanied by a squeeze out provision. Namely once you cross a particular threshold say 95% the acquirer should be able to squeeze out the minority.�
Or else they could hold you to ransom for a long time!!! And even take you to court over pricing as Essar Steel discovered. It took the company an entire year to delist.
So your stock's going for a pittance and you want to go private - if you're lucky you'll succeed at doing so by this time next year. Unless new delisting norms are put in place. Last year's concept paper to amend the delisting guidelines is still hanging fire.
Essar Shipping, Essar Steel, Blue Dart, Astra Zeneca, SKF India, iGate, Ingersoll Rand, Balsara Hygiene - they all tried it, but only three succeeded. Getting off the exchange is tougher than getting on in India. So what if falling stock prices are luring companies to go private instead?
TV Raghunath, Head-M&A, Kotak Investment Banking says, �If the capital markets are down as they are today clearly, an exit at these prices and at a premium to the current prices is a good option for the exiting shareholders to use. And for the promoters, it�s a good price to buy. So from an economic equation standpoint it�s a very opportune time. The question that will determine whether it�s successful is a function of two things- how the promoter gets liquidity cause he has to finally cut a check to the shareholders and at what price the delisting price gets discovered, what is the exit price which is discovered.�
And that exit price doesn�t always lead to an exit door for companies, thanks to the reverse book-building process in SEBI�s 2003 Delisting Guidelines. In reverse book building - the promoter quotes a floor price to buy out shareholders. Shareholders can in turn quote prices at which they are willing to tender their shares.
The price at which the highest number of shares are tendered in, becomes the discovered delisting price.
Cyril Shroff, Managing Partner, Amarchand Mangaldas which can work in an adverse way if one shareholder decides to skew the process by bidding fairly high. It has resulted in a situation where this is so artificial that the book building price is 2-3 times the market value which makes it completely uneconomical for an acquirer to delist at such a phenomenal premium to the market price.
That's what happened to Pharmaceutical company Astra Zeneca, which went through one of the country�s very first reverse book building processes in 2004!
The company�s shareholders discovered a price of 3000 rupees per share for delisting, compared to the promoter floor price of Rs 825. That was a premium of 260% to the company's then prevailing stock price!
More recently, in 2007, logistics company DHL made a delisting offer to shareholders of its Indian subsidiary Blue Dart at a floor 10% higher than the market price-but that wasn�t good enough for DHL shareholders, who demanded a 72% premium. Needless to say - neither of these offers went through.
In times like these - it's even more unlikely that promoters will be willing cough up big premiums, or any premium at all. There's no going private, till reverse bookbuilding is well, reversed.
Cyril Shroff, Managing Partner, Amarchand Mangaldas says, �The pricing formula needs a fundamental relook. And until it is combined with some fair transparent way of bidding process, it should be linked with the market price. It can be at a premium to the market price. You can fix even artificially 25% 50% whatever as a regulation can be prescribed as a premium above market price so that there is an inbuilt element ot enable an acquirer to go ahead.�
Price is one big problem, response is the other. The guidelines require almost every shareholder to play along. For larger companies, 90% of stock has to be acquired by the promoter, whereas a 75% acquisition is mandatory for smaller companies to delist. All this right at the reverse bookbuilding stage or else the offer fails.
Investment Banker Sourav Mallik says, �To get a retail shareholder into a trading terminal and get them to upload their bid has always been the challenge. so when you had a threshold as high as 90% which meant that you have get a significant portion of the retail shareholders to the trading desk, that become a challenge.�
This challenge is exactly why Essar Shipping�s 2007 delisting offer wasn�t smooth sailing.
The company fell short of the delisting threshold by 15% and the offer sank.
Cyril Shroff, Managing Partner, Amarchand Mangaldas says, �Main reason why offers have been failing is that they have been unable to get the required quantity and meet the SEBI and stock exchange regulations in terms of the minimum number that they need. Like in your example, they keep falling short of the higher number. The quantitative number is too high.�
And even if that high threshold is reached-the battle isn�t quite won. Once the company delists at say, a 90% threshold, what about the remaining 10%. No regulation forces them to sell or squeezes them out!
So promoters may pay the price, get the response and yet never own 100% of their companies.
Cyril Shroff, Managing Partner, Amarchand Mangaldas says, �The lacuna in India is because of the lack of a squeeze out. Once you give this sort of ability for sellers to fix a high price, logically it should be accompanied by a squeeze out provision. Namely once you cross a particular threshold say 95% the acquirer should be able to squeeze out the minority.�
Or else they could hold you to ransom for a long time!!! And even take you to court over pricing as Essar Steel discovered. It took the company an entire year to delist.
So your stock's going for a pittance and you want to go private - if you're lucky you'll succeed at doing so by this time next year. Unless new delisting norms are put in place. Last year's concept paper to amend the delisting guidelines is still hanging fire.
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