Aeonian Investments co. Ltd [BSE code AEONIA] is an investment company which holds 1) listed equities 2) real estate property 3) stake in unlisted company of one of its promoter company [Mazda]. Promoters hold 87% stake in the company and are required to reduce it to 75% by June 2013. As the holding was quite diversified, delisting was not possible, promoters decided to go for Member’ s Voluntary Winding up. You can read BSE notification here. This company is well covered on Library Equity blog. You can read the detailed post here. Download Mind Map containing brief summary from here
I have done fair value analysis here taking into consideration taxes payable on disposal of assets and distribution of funds to shareholders which is considered as dividend and taxed accordingly. I have applied a discount of 20% to current market value of listed companies to account for any sudden decline in market. Real estate was acquired in late 2003, so 5 x appreciations may not be unreasonable going by increase in real estate prices in Mumbai. Stake in unlisted company is being valued at 5x PE or approximately 1.3x estimated book value. I have arrived at a fair value of around INR 230 and at current price it provides absolute return of around 45% [but don’t be fooled by absolute return]
Investment opportunity: This is a case where absolute upside can be calculated with fair degree of certainty, but annualized return to shareholders could be mediocre if time taken in winding up is unreasonably high and no funds are distributed till the entire winding up proceeding is completed. At the same time there is a possibility [or merely my SPECULATION] that even before completion of winding up, price may hit around INR 225, but don’t bet much on that. Let’s analyse the risks in detail:
1. Deal risk: None, as unlike for delisting, there is no provision in the Indian Companies Act, that promoters should not participate in the resolution. So even the special resolution can get cleared easily in general meeting
2. Time risk: Very High As per my calculation, even if it’s a fast track winding up, it will take atleast 15 months and may stretch up to 24 months with income tax department and court/tribunal involved. – One firm, Vinod Kothari claims that in their last two decade of practice, they could not see any company going through voluntary winding up. Though it seems exaggerated, but point is it can be very time consuming process.
- 3. Management risk:
- Chances of management doing anything hurting minority interest appears to be very less. As per my limited analysis and checks management integrity appears to be high and haven’t noticed anything which they have done to hurt minority interest. As per companies act, as soon as liquidator is appointed, powers of board of directors and managing director cease to exist and all disposal of property has to be as per consent of liquidator. But again companies act provides that general meeting may decide to give certain powers to board and management. So possibility of management doing something against minority interest cannot be ruled out completely.
4. Market risk: Uncertain: More than half of the value is from listed shares, so possible that by the time company dispose of shares, prices may decline by 20% or more. [current fair value is after considering 20% discount to current market cap].
5. Drivers of value:
- Real estate and value of unlisted companies can drive the value much higher or lower.
Conclusion: It’s debatable whether or not to invest in this opportunity. As long as downside is capped with fair possibility of equity like returns [double digit returns] I am comfortable with investing in any opportunity. This investment opportunity may not appeal to those investors who look for far more certainty, which CERTAINLY is ABSENT here. There is no way to determine the time which will be taken to conclude the winding up process. Investors who look for far more visibility and certainty may very well skip this opportunity. Another way to look at this investment opportunity is, if one is sitting on extra cash in fixed deposit or debt instruments, one may allocate some part of it to invest in this opportunity as most likely the annual CAGR will be atleast 10% [with some probability of losses or low single digit returns] and at the same time provides opportunity of greater profits if winding up is completed faster than expected. In my opinion absolute loss is quite capped here save otherwise for any black swan event like another crash like 2008 wherein equities market, real estate everything gets hit at the same time.
Returns under various scenarios assuming constant fair value and variable being time taken for winding up.
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