The contentious and hostile open offer of Vijay Mallya controlled Mangalore Chemicals and Fertilisers Limited (MCF) entered its final stage with the time for revised bids expiring on 25th September. The revised bid from SarojPoddar of Zuari Agro who is acting in concert with Vijay Mallya was revised from Rs 68.55 to Rs 81.60, while the offer from Deepak Fertilisers was revised from Rs 63 to Rs 93.60.
The final offer price as on date to acquire 26% of the shares or 3,08,13,393 shares remains Rs 93.60 from Deepak and Rs 81.60 from Zuari. The present shareholding pattern is that Deepak Fertilisers group owns 25.31%, Zuari group owns 16.43% and UB group of Vijay Mallya owns 21.97%. If one were to combine the holding of Zuari and UB the same increases to 38.40% still requiring a further 11.61% to get the majority while Deepak requires 24.70% to get the majority.
The total public shareholding is 36.29% and the open offer is from two competing parties to get 26%. Considering the fact that the difference in offer price is huge all investors wishing to tender shares would do so to Deepak Fertilisers only. There could be one exception that shares which were acquired with the intention to tender in the open offer on behalf of the two competing factions could still get tendered on the basis of the group and not necessarily in the best interest of the investor.
Domestic institutions collectively hold 4.30% of the share capital while one single institution Karnataka State Co-op Marketing Federation owns 2.28% of the share capital. Considering the fact that the UB group is headquartered in Bengaluru or Karnataka, there is no way these shares if tendered would ever go in favour of the Zuari-Mallya combine. Further of UB group’s holding of 21.97%, as much as 18.25% or 83% is pledged with a number of banks, institutions. One is not sure whether these shares can be tendered in the open offer by the institutions with whom they are pledged but if allowed under law they would be more than willing as the price which they would be obtaining for them is substantially higher than what they have advanced in the pledge.
Coming to the question what should investors do? The price being offered is more than fair price and is at the current level only because of their being a hostile takeover. In normal circumstances and if there was a sale to be negotiated the bidder would not be willing to pay such a price. I believe the option for investors exists only in the form of sale. In case the investor has been holding these shares for a long time and would be subject to long term capital gains it make sense to sell the shares in the market and take advantage of the tax benefit and maximise the returns. In case the shares were bought less than one year ago then they could be offered in the open offer to the higher bidder which in this case is Deepak Fertilisers.
The acceptance ratio should be more or less at 100% simply because there is always a certain portion of shareholders who do not tender and many who would sell on the screen and the buyers would then offer the shares taking advantage of the arbitrage. Further there are small shareholders whose shares are yet to be dematerialised and signatures would not match and so on. The balance sheet stares that as of 31st March 2014 the dematerialised shares are 92.04%. This means that 7.96% of the share capital remains to be materialised and this holding is typically of small shareholders. Assuming that all the outstanding shares are offered to Deepak, the acceptance ratio would be 71.64%.
I believe that the though the long term prospects of Mangalore Chemicals are great once there is a change in management, the prices would significantly ease simply because the current prices are for the event. The EPS for Mangalore is Rs 5.99 based on March 14 results which translates into a PE multiple of 15.62 based on open offer price of Deepak Fertilisers. Similar performance by the competing companies shows that for the same period ended March 14, Chambal Fertilisers earned an EPS of Rs 5.87 on a consolidated basis and the current price of Rs 55.95 means that the PE is 9.53 times. Deepak Fertilisers earned an EPS of Rs 27.27 and the price is Rs 159.25 and therefore the PE 5.83. It therefore makes no sense to hold on to the shares of Mangalore Chemicals.
In conclusion this offer is God send and advantage must be taken care of. Ensure that you tender the shares in the open offer or sell in the market depending upon the individuals need. The open offer closes on Friday the 17th of October, hence all market sales must preferably be completed by 14th October or latest 15th 1october.
Great offer must accept.