Alfa Laval- a delisting play

Alfa Laval of Sweden, the parent of Alfa Laval (India) has declared its intention of de-listing it from Indian bourses. Indian economy’s long term growth prospect have lured lot many MNCs to look at taking the companies private since they do not want to share their future plans with the public and especially their competitors. Most of these MNCs are sitting on tons of cash and nowhere to deploy except the emerging markets.

Alfa Laval is one of the best companies in its play area and I have had long experience of dealing with them as buyer of capital equipments for my old employers. First rate management, great equipment and excellent service. Great ROE.

Currently Alfa Laval AB holds 16,120,281 shares amounting to 88.77% ( as per June 2011 shareholding pattern) while the balance 2,030,093 shares are widely dispersed with 9851 individuals holding 1,865,720. No one holds 1% of the equity of company unlike Blue Dart with R Damani & Co hold more than 5% shares. Only 4 individuals hold about 43,000 shares and 280 body corporates holding little less than 76,000 shares and few NRIs holding about 44000 shares.

For delisting the shares, during the reverse book building process, enough shareholders need to tender their shares to ensure that

a. the tendered shares together with the current holding of promoters crosses 90%

b. tendered shares constitute more than 50% of remaining shareholders

This stipulation means that at-least 1,015,047 shares need to be tendered.

Now this is a fairly tall order but doable.

I heard on TV someone doubting if this de-listing can actually take place given this widely held nature of the shareholding and I believe that it is possible if promoters are genuinely interested in it.

What can happen during the intervening period of  approval by shareholders and others and the actual reverse book building is that some players enter the picture and accumulate shares from the market. This can be also be a managed affair with a deal being struck by the merchant banker with friendly parties such as mutual funds etc. who can then tender their holding at a pre-negotiated price.

Generally the merchant bankers launch a fairly aggressive call out operations during the buy-back/reverse book building process and I have received many such calls in the past asking me to participate in these activities. Also merchant bankers can personally approach indviduals to offload by offering them a good price and picking up their shares.

De-listing price: Current market price convergence at 2250 seem to suggest that promoters may announce a floor price of about 2000-2100 and hopefully gather enough shares to ensure that the highest price at which max shares are tendered is around 2400-2500. It can also give enough time to friendlies to gather shares from the market by ensuring that certain despondency is generated in the individual shareholders by depressing the price in the market.

What can an individual investor who is already a shareholder do:  I think you should sit tight and wait for the process to begin and tender your shares at a price of 2500 during the reverse book building. I am going to do this.

Someone who is not a shareholder should not enter the market at these prices. If the delisting process does not go through for some reason then the price can fall back to 1600-1700 levels fairly quickly. Your best bet would be to pick up the shares once the de-listing price has been discovered and accepted by promoters.

After the successful close of reverse book building and acceptance of the price by the promoters, it takes approx 4-6 weeks for the shares to delist. In this time the scrip usually trades 2.5-3% below the delisting price ( sometimes if you are lucky you can get even 5% lower ). You can buy during this intervening period and tender your shares to the promoters ( they will send you the necessary docs for the same ). Total time from the purchase of shares during the intervening period and your realising your money is approximately 2 months. So while 2% gain ( after brokerages and demat expenses) may not be much, remember that this is virtually risk free and part of your fixed income allocation can be deployed here.

I do this all the time and find it to be a fairly profitable trade.

10 thoughts on “Alfa Laval- a delisting play

  1. Very aptly said Suhai. I take these opportunities to learn the nuts and bolts of the market which is ever evolving thanks to the regulatory action by SEBI and Stock Exchanges. See this as part of Debt portion of the Asset Allocation program.

    Also there are ways to taking care of capital gain legitimately. One needs to book a short term loss and buy the next day. ( Delivery needs to take place). So for a small cost of brokerage and STT, one can save on the capital gain on these kind of profits.

  2. Thanks. Almost clear. One little thing:

    “If they accept it, they will announce the same and apply to the stock exchanges where they are listed for delisting. This part of delisting usually takes about a month. During this period the stock will trade at a discount to the delisting price and this discount can vary from about 2% to 4%”

    Where/how to auto-track this final price and de-listing announcement? I mean like an alert or feed somewhere on BSE/NSE/moneycontrol site? I want to participate in it just for the experience.

    Thanks

  3. I think delisting process is fairly detailed out but let me elaborate. Now that company has had a formal board meeting, they will send out a special resolution by way of postal ballot ( say about 1 Month), count the results of the same ( its a given that the result will be positive). Thereafter promoters will appoint a merchant banker, set a floor price ( the price they want to pay at the minimum ) ( its already happening probably in parallel. The merchant banker will then send out the offer to existing investor, approach BSE for reverse book building ( 15 days ). Reverse book building process is usually on for about three days at the end of which we will know the price at which majority investors have tendered their shares. This price will then be decided upon by the promoters (1 week). They can decide to reject it or accept it. If they reject it then the whole thing falls through and the market price will likely drop to about 1700. If they accept it, they will announce the same and apply to the stock exchanges where they are listed for delisting. This part of delisting usually takes about a month. During this period the stock will trade at a discount to the delisting price and this discount can vary from about 2% to 4%. Once the stock is delisted, an investor who might have bought it during this intervening period or may not have tendered it during the reverse book building can do so now and he/she has 6 months for the same.
    So if you are smart you will buy as near the delisting date ( announced by the stock exchanges) but the discount will keep going down.

    What is the catch: there is no risk per se but there is a tax on the profit at the marginal rate of taxation since the stock is now no longer listed. Since one would have bought the stock may be a month before selling short term capital gain tax on which STT is not paid would become applicable ( if u r in 30% tax bracket, you pay 30% on the profit ).

    So there you are. trust this makes it clear.

    cheers

    Sunil

  4. Hi Kiran,
    I’m a relative amateur to stock mkts, so pls tolerate my Qn if it turns out to be stupid. Most of my gyaan lately has been through following you guys on social media.

    In yr last para what you are essentially saying is:
    a) Say delisting decision is confirmed on 1st Nov (I’ve no idea, just picking a date from hat) and released out to the markets – say at a price of 2500.
    b) By 2nd-5th Nov the same stock will be traded at a 2-3% discount ie: 2425-to-2450.
    c) Any idiot investor like me can then swoop in and purchase as many shares as possible by 15th Dec at this discount. Even opt for leverage if available.
    d) I sell back the share to promoters at price (a) and gain a 2% assured no-downside return?
    e) Is there something like a record date for delisting? or whoever is holding the stock on the last day gets to sell it back?

    What’s the hitch? I don’t see any risk here! Promoters have already got necessary approvals and accepted the price at (a) which is well-published and I’m assuming released to the mkt. So one knows full well in advance the assured price of this stock. Why would it then trade at a discount?

    As I said, I’m quite new and my knowledge of these special situations is limited.

    In short : Is this essentially a free lunch? Shouldn’t any student of value investing wet his pants at this situation?

    Can you explain the delisting process a bit more?

    Thanks.
    @kazisuhail

    • Let me see if i can help answer your questions in short.
      From the 2% you also have to deduct the brokerage charges on buy and sell and tax on short terms gains. So, what %tage of gain will you be left with for how many days of investment.

      Theoretically what you are saying is correct yes.

      I saw this happening in case of ‘Binani cement’ recently. The price hovered around 81-82 even though the rumor was that it will de-list at 90. Even after the announcement of delisting price it was available for 88-89 for a long time.

      So, Good Luck

      • Good point though I see Binani and Nirma as exceptions. In the last 4 years I have on an average made 3-3.5% in lot many issues. Yes, it does take some bit of experience of timing the entry.

      • Thanks Rajpanda; on-rereading Sunil made it clear in his post as well. Maybe I am over-enthused a bit more than the situation demands. No one will get rich from it.
        But this is certainly some inside-baseball stuff which most avg-Joe investor like me wouldn’t know about. It’s certainly difficult to find explanatory writings about such corp. actions (M&A, demerger, spinoffs etc) in layman terms with simple arithmetic. Quite recently, I discovered Prof Bakshi and his blog is a godsend for any amateur investor like me.

        I’d still participate in this AL delisting with a small position just to get 1st hand experience of the motions it goes through.

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