Delisting of Suashish/Fresenius – Same Same but Different

Statutory Warning: Following someone else CONVICTION can be injurious to your financial wealth. Out of five RECENT delisting/potential delisting cases my understanding in TWO cases was totally WRONG and I incurred LOSSES, infact both of them are TOP competing candidates for ‘Wall of Shame’ post, which I plan to publish at the end of the year. Please do you own due diligence before investment.

Summary

I had posted on Suashish Diamonds earlier here, where I tried to analyse why it might be a case of COLLUSION among promoters and top shareholders. Going by the fact that despite announcing the floor price of INR 230, stock price never crossed the floor price, there are only two possibilities 1) My earlier suspicion that it’s a case of COLLUSION among promoters and top shareholders to get the delisting done at ultra cheap price appears to be correct or 2) Market is not confident of delisting going through. In the same post mentioned earlier, I had briefly touched upon Fresenius Kabi Oncology delisting, which is widely SUSPECTED to be another case of COLLUSION between promoters and top shareholders to get the delisting done. You can read Fresenius Kabi Oncology  delisting case in detail here. Shareholders of both the companies have cleared the postal ballot. Despite this, share price of both the companies are trading at around 15-18% DISCOUNT to the indicated delisting price. As per newspaper reports, SEBI has raised objection for Fresenius Kabi Oncology delisting plan, which is immediately after going for offer for sale [OFS] to reduce promoter stake.  Fresenius Kabi Oncology MAY get stuck in a LoooooNG LONG ….. LEGAL BATTLE with SEBI. In case of Suashish Diamonds it’s NOT EASY to prove case of COLLUSION. Probability of Suashish Diamonds getting stuck with SEBI is VERY REMOTE [though probability still remains that it may get stuck].  There is a high PROBABILITY that one can get 10-20% return within a time period of 3-4 months, but if Suashish diamond get stuck with SEBI or promoters decide not to go ahead with delisting plan downside can be enormous ( >30%). But I do BELIEVE that any such probability is ULTRA LOW. Another perfect case of PICKING UP PENNIES IN FRONT OF A ROAD ROLLER.

See the mindmap summary here 

In Detail

From the above table it’s clear that Mr. Market is treating both the above cases of delisting to be same. But I think, there is a high PROBABILITY that one can get 10-20% return within a time period of 3-4 months in case of Suashish Diamonds. Another most important distinction between the two that Fresenius Kabi Oncology might be suitable for long term investment.  But going by the Suashish Diamonds corporate governance history, its not worth holding for long term at all. I will NEVER EVER touch stocks like Suashish Diamonds for my straight equity even at ULTRA CHEAP valuations. Its more a opportunistic bet for me.

What can go wrong?

1)     Like Fresenius Kabi Oncology, even Suashish Diamond may get stuck with SEBI: Unlike Fresenius Kabi Oncology, where top shareholders were issued shares through OFS route [SEBI offered Offer for sale route only for the purpose of meeting minimum shareholding norms.], in case of Suashish Diamond case top shareholder Religare Finvest [3.2% stake] bought shares from open market. So it will be very DIFFICULT to prove case of collusion and infact there may not be ANY COLLUSION and it’s just my ILLUSION. Suashish diamonds case is more like Amrit Banaspati case. Read here for more details.  

2)     Reverse book building fails [RBB]: VERY LOW PROBABILY Religare along with other top 14 individual shareholders hold more than 5.2% stake. Suashish diamonds require 5.3% tendering for delisting to be successful. In the postal ballot, 5.6% of the public shareholders participated. Assuming that shareholders who took PAIN to participate will TENDER their shares in RBB, chances are very low that delisting will fail.

3)     Is it a case of pump and dump like Compact Disc delisting case: Nopes Read about Compact Disc delisting case here . In that case promoter intention was too just pump the share price and use that opportunity to provide exit to themselves and some others at higher price. Suashish Diamonds had tried to do delisting earlier in 2010 at an indicated price of 220. Despite being aware of the fact that mutual funds holds majority of the public stake and will not tender any price lower than INR 300, it went till the RBB stage, which shows company’s seriousness to get delisted. Suashish Diamonds promoter need to spend around 50 crs to get the company delisted. As on Mar-13, company had around 200crs [net of debt]. Suashish Diamonds is a CASH COW for promoters and I THINK they will get it delisted.

4)     Delisting price lower than INR 230: There is no legal compulsion for the promoters to pay the indicated delisting price. There is a possibility [THOUGH VERY LOW] that the discovered price in RBB is lower than INR 230. I am not aware of a single case where the delisting price has been lower than the indicated price by promoters. On the other hand there is a possibility that delisting happens at a nominal premium [Max another 5% upside. Not betting on this, but this can add more upside to existing spread of 15%]

5)     Why should top shareholder surrender shares at 230? As per my rough calculations Religare acquired its stake at around 130-140 per share between September 2011 and December 2012. So even if its tender its shares at 230 per share, it will earn CAGR of more than 30% in less than 2 years or a flat return of more than 60%. Suashish Diamond shares trade in illiquid category, company had not paid any dividends in the last 5-6 years and going by the past deeds of promoters, Religare may find it very difficult to sell their stake to anyone, so only possible exit is through surrendering shares in RBB. And lets not forget that these are SMART investors. They get to know about promoters future plans much before small investors like us. So most probably Religare bought shares after given ‘assurance’ of hefty profit on delisting.

6)     Like APW president company may not come up RBB for next 9-10 months   This is a real risk which may make the absolute return of 10-15% quite unattractive. I derive comfort from the fact that SEBI had already imposed lot of restrictions on promoters who are not compliant with minimum shareholding norms and secondly I have noticed delay mostly in cases where the promoters are not confident of garnering enough shares under tendering or where there is no consensus on the delisting price between promoters and top shareholders. In case of Suashish Diamonds there are no such issues.

7) If there is high PROBABILITY of delisting at INR 230 then why arbitrageurs have not bid up the price?

I really do not have any clear answer for this. It might be because of the fact that the stock trades under ‘Illiquid category’ [hourly call auction system] and for most SMART investors stocks under illiquid category has become UNTOUCHABLE. It might be because these smart investors think that RBB might not start for next 8-9 months, so annualized returns are not attractive and they might be very well right in this regard. The recent resignation of their company secretary raises the risk of delay. This is  a REAL risk.

Disclaimer

  • All the posts on this blog, including this one, are for educational and discussion purposes only.
  • None of the material posted should be regarded as advice to buy/sell any stock. I do not have any proven stock performance record to talk about.
  • As a professional investor, I may have positions in stocks discussed.
  • Main objective is to seek contra views and not to recommend any particular stock as buy or sell.
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One Response to Delisting of Suashish/Fresenius – Same Same but Different

  1. Pingback: Some current delisting situations | Contrarian Edge

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