Blue Dart-is there money to be made

DHL-an arm of Deutsche Post, the parent of Blue Dart (BDL) has made no secret about its desire to de-list BDL from Indian bourses. It made the first formal attempt in Oct/Nov. 2006 wherein it refused to pay the reverse book building discovered prices of  Rs 950 per share . It wanted to pay only Rs 600.

Germans as people are not very market savvy. They are not driven by this valuation driven business philosophy of Americans who do not hesitate to divest a business if the valuations metrics do not work in their favour. Germans are more bottom line and market dominance driven besides valuing product excellence. This is the reason that it made no sense for them to pay Rs 950 when the fair price according to them was no more than 550-660.

They have come to regret that decision since then.

A group of investors identified, Blue Dart  as a value play. These investors led by Ramesh Damani, the much on TV, market guru ( Note: I respect the guy’s investing capabilities ) bought almost 5.5% of the company from couple of FIIs like Citi in the meltdown period of Oct-Dec 2008. I guess they paid no more than Rs 500 per share.

For someone like me who identified Blue Dart, right after its delisting fiasco, in 2006, this was a validation of sorts.

Damani & Co betted on couple of factors.  One: Blue Dart was the most trusted package delivery company in India and Indian and China were the growth markets for players like Fedex, UPS and DHL hence Blue Dart would attract a significant management attention from DHL. Incidentally DHL had right from 2005 onward, started to integrate its backend with BDL so its intentions were no secret.

Two: Since Germans per se have a healthy dislike of stock markets, DHL would prefer to grow the business away from the prying eyes  and it was only a matter of time that it would revisit the chapter of delisting sooner or later.

Third and the most important factor was that Finance Ministry had made it abundantly clear that it wanted a minimum public holding of 25% in all listed companies. This only means that the pressure to delist would become more and more severe over time.

SEBI’s delisting guidelines are totally loaded in favour of the minority shareholders and a company desirous of delisting needs to get minimum 50% of the remaining shareholders to commit and indicate a price or enough shareholders to come on board the proposal so that the combined shareholding of the promoters and consenting shareholders goes over 90%.

Now let’s look at the shareholding pattern as of 30th June , 2011

DHL 81.03%
        SBI MF 4.74%
        IDFC MF 2.00%
FII 1.5%
Body Corporates 5.76% of which
  Derive Trading & PAC 5.49%
Individuals 4.56%

For DHL to be successful in its efforts, it has to either get half of the remaining shares ( 9.48%) on its side or get at least 8.97% to take its shareholding to beyond 90%.

Ramesh Damani & Co. together with SBI and IDFC MF hold 12.23%. Now  anecdotally we all know that Bombay investing community is a fairly closed and chummy club and it is very likely that SBI and IDFC will not act solo and would pool their efforts to get DHL to cough up.

Germans don’t like their b***s being squeezed and they are baulking at the rumoured asking price of 2500. I understand from the market sources that an offer of 2000 has already been made and rejected.

How much will it cost DHL to buy out the minority shareholders ( and it has to pay the same price to everyone that it will pay to some, so no worries ). There are approx 4.5 million shares outstanding besides the promoters. At Rs 2500, this bill would come to Rs 11.25 BN which means the valuations would be over 5 X sales and over 60 times CY 10 Net profits (Rs. 940 Mn).

I think ultimately the decision would be in the hands of the Asian bosses sitting in Singapore who are more in tune with the Emerging market story.

At today’s buy price of 1700, one stands to make a profit of a minimum of 300 which works out to 17.64% and if you are lucky and Damani’s negotiating skills work then one can walk away with a return of 47%.

I have no clue on the time that this process would take. It may take few months or even a year or even more.

On a standalone basis, at the current price, the company is quoting at about 3.8X CY10 Sales and approx 43 X Net profit.( CY10 numbers). Of course in the first two quarters of the current year, company has grown more than 35% YOY. It is this growth which DHL is banking on.

There is nothing called safe bet in the market and it is but a game of possible outcomes and the probabilities and on that score I have a weighted average probability of 2250 happening at about 0.7.

A link to ETNOW interview with the Asia Head of DHL.

Disclaimer: I have  been holding on to my stake. At the same time, there are trading opportunities in the stock since it fluctuates with every hint of a deal being clinched, hence I will play on both sides.