IVRCL Limited is in the news for the last few weeks. And, an interesting situation is developing, where a hostile takeover is in the process of being enacted. Subhash Goel of the Zee Group has acquired 32,769,000 shares or 12.27 per cent through Asian Satellite Broadcast Pvt Ltd, while the promoter holding is at a low 11.18 per cent. The possibility of a hostile takeover is looming large, and things were moving in that direction till Goel, after making an offer to buy out the promoter at Rs 90 per share, stated he would not buy more shares from the market. Is that a way to cool things off or a final stand only time will tell, but the price has softened for now.
Why the interest in IVRCL? Essel Infraprojects, a Zee Group company, is also in the business of infrastructure and has an order book of Rs 25,000 crore with roughly Rs 7,500 crore being from road projects. The present backlog of order book that IVRCL has is Rs 25,500 crore. Combine this, and it becomes a massive Rs 50,000 crore-plus.
Essel is currently cash-rich, and has strong cash flows from other businesses which can support future growth. IVRCL is overleveraged, and has therefore become vulnerable. Further, the promoter of IVRCL has not been able to increase his stake in the last eight years. By stepping into IVRCL, Essel gets an entry into Andhra Pradesh and then into Southern India, where Essel does not have any significant presence.
On the fundamental front, there has been an unexpected 50 basis point repo rate cut. This would lower interest rates sooner than later. Also, cement prices have begun to soften by Rs 300-400 per tonne, both of which are positive for the company and the infra space.
The performance of IVRCL has dropped significantly over the current year. Meanwhile, IVRCL has informed the stock exchanges that it has extended the current year ending March 2012, by three months. Now the company’s year-end would be June 2012 and results would be for the period of 15 months. This delays the AGM and gives more time to negotiate and resolve matters.
What makes this story interesting is that whenever there have been tussles where the present incumbent (promoter) does not have effective control, there is an opportunity for a hostile takeover.
In such cases, irrespective of the final outcome or settlement, investors who join the battle midway are seen to have benefitted. It is important that the holding of the incumbent should not be that of majority or near majority. An example: Great Offshore, where the promoter,Vijay Sheth, pledged his shares and had to transfer these to Bharati Shipyard when he was unable to pay the margin call. The holding of Sheth in the company was 15 per cent.
There was an open offer made by Bharati Shipyard, and then a hostile bid was made by ABG Shipyard as well. The open offer price was at Rs 344. This was revised to Rs 405 and then Rs 520 and finally Rs 590. The upward revision clearly resulted in benefit to shareholders from the third category, where they were neither the promoters or the intending acquirer.
The present shareholding pattern is evenly distributed between institutional investors who hold 42.52 per cent and non-institutional investors who hold 46.5 per cent. No battle for takeover gets over quickly and easily. There are many ups and downs and many near-misses. There are many games and strategies, which are employed in such takeovers.
As mentioned before, patient investors make money when there are two parties involved in a battle that does become ‘dirty’ at some point in time. Institutional investors will support or offer their shares to the highest bidder. Future growth prospects will get their vote. At the end of the day, they are also investors and need to make money. The only call they have to take is whether it is in their interest to cash out or stay invested. In such a scenario, I believe investors who have patience and are willing to weather denials, counter-denials and plenty of market upheavals will make money. The promoter, in this case, does not appear to have the wherewithal to sustain a hostile takeover. It would be upon the aggressor who has the money to decide as to how far he is willing to go for the takeover. There would be interesting days ahead for all investors.
article appeared in business standard on friday the 20th April