Open Offers one of the special situations, is hereby explored in detail to understand how we can make money as an arbitrageur as well as an investor

1. The gross profits appear quite small individually in a special situation, but in aggregate
Ashish Kila
Perfect Research

2. 
Our Chairman - Mr. R.A. Kila

Perfect Research Team

3. 
““Workouts” – these are the securities with a timetable. They arise from
corporate activity – sell-outs, mergers, reorganizations, spin-offs, etc. In
this category we are not talking about rumors or “inside information”
pertaining to such developments, but to publicly announced activities of
this sort. We wait until we can read it in the paper.”

The gross profits in many workouts appear quite small. It’s a little like
looking for parking meters with some time left on them. However, the
predictability coupled with a short holding period produces quite decent
average annual rates of return after allowance for the occasional
substantial loss.
--Warren Buffett

4. 
In the broader sense, a special situation is one in which a particular
development is counted upon to yield a satisfactory profit in the security
even though the general market does not advance. In the narrow sense,
you do not have a real “special situation” unless the particular
development is already under way.
-- Benjamin Graham

“Something out of the ordinary course of business is taking place that
creates an investment opportunity. The list of corporate events that can
result in big profits for you runs the gamut — spinoffs, mergers,
restructurings, rights offerings, bankruptcies, liquidations, asset sales,
distributions.”
-- Joel Greenblatt

5. 
De-listing.

De-merger.

Mergers and Acquisitions.

Tender Offers.

Bankruptcy Proceedings.

Spinoff.

6. Delisting
De-merger
Open Offer







Huge investments possible normally due to good liquidity.
Well defined timelines.
Very low failure rate vis-à-vis delisting etc.
Risk of withdrawal by promoter absent.
Calculated risk is fairly low as compared to others.
Decent number of such opportunities available throughout the year.
Lastly, we can use this corporate event as an opportunity to create cheap
shares…

7. 
Open Offer :- Introduction

Checklist of Open Offer.

Using Open Offer to create cheap shares
Examples from our Investment History:1.Orient Refractories.
2.Shanthi Gears.
3.Liberty Phosphate.

Highly Liquid Vs Illiquid Open Offers
Examples:- HUL , Crisil and Gujarat Auto.
7

8. 
An open offer is an offer from either the promoters or a big
investor to buy shares from the open market at a fixed price.

Most open offers come at a premium to market price.

Offers could be voluntary or compulsory.

9. 
Friendly Takeover.

For Raising Stake.

Hostile Takeover.

10. OPEN OFFER
REQUIREMENT:

11.  SEBI Takeover Regulations 2011 - Shareholding
Thresholds:-

13. Source:Financial Express,Business Standard

14. -For special situation opportunities we go through BSE website’s corporate
announcement section.
-Also most of these announcements come in Financial Express Newspaper.

15. Public Announcement
Whole process takes approx 3 months . Delay could happen at SEBI level for giving its
comments on DLOF and subsequently seeking questionnaire from merchant banker.

17. 
There are some risks involved into open offer cases:
1.Deal Risk: There are always some risk from regulatory side that the deal
may not get through eventually. Acquirer's profile also plays an important
role in shaping the final outcome of the deal.
2.Time Risk: Clearance from various regulators (SEBI, RBI,CCI,FIPB etc.) is
required for the deal to get through. It may take some considerable time in
getting the final approval especially in the case where the acquiring
promoter does not have a clean track of public market activities and there
are some controversial clauses embedded into the deal agreement.
Note: Interest on delay: If there is delay from acquirer side to reply SEBI
queries, then the interest @10% is paid to the shareholder for delayed
period(As in case of Wintac)

18. Exceptional Case…??
SEBI Se Panga..!!

19. 
In October,2011Marg Ltd made an voluntary open offer to acquire the
20% fully diluted voting capital at Rs.91 per share.

Due to previous takeover violation by promoter SEBI asked the
promoter to revise the offer price to Rs.216 per share .

Promoters of Marg ltd. moves to SAT against SEBI order and pray for
withdraw of open offer because of delayed reply from SEBI site.

SAT allowed to withdraw open offer .

Now SEBI moved to Supreme court against SAT Order.
Link
Link

20. 

Acquirer background and financial strength would have raised
flags for the Marg case
Also an additional check could be that unless an open offer given
by existing promoters is by large Indian/MNC corporate, we should
prefer
a) Change of Control Transaction
Because existing promoters are price sensitive (like Marg) as they already have
control over the company whereas any new acquirer will only get control after
the deal goes through. So new acquirer will pursue the deal more vigorously

21. Keeping Tab of Timelines

22. -For tracking open offer detail,we go through SEBI website.

23. Keeping Tab of Approvals

24. For checking the status of approval, we go through FIPB website.

25. For checking the status of approval, we go through CCI website.

26. 
An open offer for acquiring shares once made shall not be withdrawn
except under any of the following circumstances—
A.
Statutory approvals disclosed in the detailed public statement having
been finally refused.
B.
The acquirer, being a natural person, has died.
C.
Any condition stipulated in the agreement for acquisition attracting the
obligation to make the open offer is not met for reasons outside the
reasonable control of the acquirer, and such agreement is rescinded,
subject to such conditions having been specifically disclosed in the
detailed public statement and the letter of offer.
D.
Such circumstances as in the opinion of the Board(SEBI), merit
withdrawal.

27. 
In July,2005 Nirma Industries ltd. made a mandatory Open offer for acquisition of
Shares Shreerama multitech ltd.

After announcement acquirer found some discrepancies in financial accounts of
shreerama multitech on the basis of that Nirma filled withdrawal application to SEBI
focusing Regulation 27 (1) d of the Takeover Code which allowed the withdrawal of the
offer under ” such circumstances as in the opinion of the Board merit withdrawal”.

SEBI Disallowed the Same.

After that Nirma Moves to SAT against SEBI order and In June,2008 SAT also Dismissed
the same

After that Nirma Moves to Supreme Court against SEBI order and In May,2013
Supreme Court also Dismissed the same and Pass an order to instruct the Nirma
Industries ltd to proceed with Open offer and follow regulation.

29. 
Voluntary open offer is a statement of the confidence promoter have in
the future potential of the company and the value it is likely to bring to
the table.

if investors give in their shares, on the one hand they earn a reasonable
premium over the existing stock prices, but on the other hand, they also
lose out on future earnings if the company does well. And if you decide
not to surrender your shares, the reverse holds true.

30. 
Decision on selling or holding on to your shares should be based on a
methodical assessment of the post-takeover scenario.

Decision should be based on the assessment of the future prospects of the
acquired entity. "Assuming that the open offer is coming from a strong
acquirer who has solid plans for the company, investors could hold on. At
most times, such acquirers add value to the company."
M. Sundararajan, VP & Group Head (M&A and Advisory), SBI Capital Markets


Investors should look at open offers in the same way they would look at any
other stock from the sell or hold angle. "If an investor sees long-term
potential in a company, then he should hold on, or else surrender.
Rakesh Jhunjhunwala
Source: Business Today

31. 
We see every “Open Offer” from two perspectives:
(1) Value
investing Perspective
(2) Short
Term Perspective- Arbitrage

33. 
Share sale in an open offer is like any other equity transaction but since
there is no securities transaction tax (STT) on it, the concessional tax rate
of Short Term & Long Term Capital gains is not available
Tax Regulations for Open Offer Transaction
Long Term Capital Gains-This transaction is not exempted from long-term
capital gains tax. Hence, the gains are taxed at 10% without indexation or
20% with indexation, whichever is lower.

Short Term Capital Gains- The capital gains will be added to investor’s
income and taxed according
to the tax bracket he falls under.
Source:www.Business Standard

35. 
Open Offer :- Introduction

Checklist of Open Offer.

Open offer: Value opportunities with corporate actions as triggered
Examples from our Investment History:-
1.Orient Refractories
2.Shanthi Gears
3.Liberty Phosphate.

Highly Liquid Vs Illiquid Open Offers
Examples:- HUL , Crisil and Gujarat Auto.
35

36. 
The Company provides a wide range of special refractories and monolithics to meet
the needs of the iron and steel industry.

ORL customers include large domestic integrated steel producers and mini steel plants
that includes Steel Authority of India, Mukund Steel, Tata Iron and Steel Company,
RINL – Vizag, Sunflag Iron, Lloyd Steel, Usha Martin and the Jindal Group.

RHI, which is one of the largest refractory companies in the world acquired around
43.6% shares from the promoters and made a public offer of around 26% as per SEBI
guidelines

The agreement was entered at Rs 43 per share and the public offer for 26% was also
made at the same price.
Source:Orientrefractories.com

37. 



Refractories are non-metallic heat resistance materials that constitutes
the lining for high-temperature furnaces and reactors and other
processing units.
Refractory products fall into two categories:brick or fired shape and
specialities or monolithic refractories.
Brick or fired shaped refractories:
Monolithic refractory is the name generally given to all unshaped
refractory products. It comes in various types: Castables,
Plastic,Ramming,Patching,Coating, Refractory mortars, Insulating
castables:
Source:CERAM Research Ltd.

38. Source:rhi-ag.com

39. 




The Indian Refractory industry is estimated to grow at 10-12 per cent
annually.
The refractory industry is fragmented with more than 150 players, of which,15
to 16 are major players.
Production Capacity of refractories in India is estimated with 2.5 million
tons(MT).
The top four manufacturers account for more than 50% of the total
production volume.
India contributes to 4.5% of the world production of refractory materials.
Raw
Raw
material
material
Raw material source
Refractory
Refractory
manufacturer
manufacturer
Steel/ other
Steel/ other
industries
industries
Value added Refractories
Premium steel/lower
Source:researchmarket.com,
specific cos. Business line

40. Source:status and outlook of indian
refractory industry,B.V.Raja,IRMA

41. Particular
Revenue
Revenue growth(YoY)
EBIT
EBITM
Capital Employed
ROCE*
201303
361
20.33%
65
17.89%
105
61.74%
201203
300
12.36%
50
16.57%
77
64.58%
201103
267
22.48%
46
17.24%
99
46.36%
201003
218
3.81%
47
21.37%
78
59.84%
200903
210
23.53%
44
20.98%
77
57.57%
200803
170
19.72%
26
15.04%
70
36.56%
*Segment asset given in balance sheet is used as a proxy to capital
employed.Source:Orientabrasives.com,bseindia.com

42.  Peer Group Comparison(Standalone):
Year End
Net Sales
PATM(%)
ROCE(%)
ROE(%)
P/E(x)*
P/B(x)*
Orient Refractories Vesuvius India IFGL Refractories
201303
201212
201303
361
564
307
11.48%
9.89%
5.56%
61.74%
23.12%
14.63%
40.43%
16.24%
12.46%
11.19
12.69
7.96
6.01
2.06
1.08
Based on FY'13 annual results.
Based on standalone nos.as on 16-jan-13,moneycontrol.com
*-

43. >Refractories:
73% of total revenue for year ended march 2012 came from it's refractory business.
Particular
201203
201103
201003
200903
200803
Installed Capacity(M.T)
N/A
16000.00
16000.00
16000.00
16000.00
Capacity Utilized(CU)(%)
N/A
98.94
76.96
71.65
75.52
CU Growth rate(YoY)(%)
N/A
28.56%
7.41%
-5.12%
-28.41%
201203
201103
201003
200903
200803
Installed Capacity(M.T)
N/A
28000.00
28000.00
28000.00
28000.00
Capacity Utilized(CU)(%)
N/A
61.91
65.76
97.05
76.96
CU Growth rate(YoY)(%)
N/A
-5.85%
-32.24%
26.10%
-28.94%
>Monolithics:
Particular
Source:Ace Equity Database

44. 70
64.58
60
57.57
50
40
61.74
59.84
46.36
36.56
EBITM
30
21.37
20
10
ROCE
15.04
20.98
17.24
16.57
17.89
0
2008
2009
2010
2011
2012
2013
*Segment asset given in balance sheet is used as a
proxy to capital employed

45. 70.00%
61.74%
60.00%
50.00%
40.00%
40.43%
ROE
30.00%
ROCE
23.12%
20.00%
16.24%
14.63%
12.46%
Vesuvius India
IFGL Refractories
10.00%
0.00%
Orient Refractories
Based On FY13'03 financial results

46.  Orient



Refractories:-
Acquired by $1.29 billion German Major RHI Group, globally operating
supplier of high grade refractory products,systems and services.
RHI Group Revenue by segment and region(2012):
 Vesuvius India:
 Vesuvius India is a part of $1.38 billion Vesuvius Plc,a UK based group engaged in
metal flow engineering,developing,manufacturing and marketing ceramic consumable
products and systems to the global steel and foundry industries.
 Vesuvius Plc revenue by segment and region(2010):
Source:Rhi-ag.com,reuters.com

47. 







The RHI Group sets ambitious goals for 2020: Revenues of EUR 3 billion
and an EBIT margin of ≥12%!
In the year 2012, RHI generated 56% of its revenues in the emerging
markets.
In the year 2020, this share may amount to 70%.
Southeast Asia and especially India are currently among the most
attractive markets for refractory products.
India is one of the fastest growing markets for refractory products.
RHI Refractories had been the largest importer of refractories in India
before 2007.
RHI, has picked up 51% stake in Clasil Refractories,India in Feb 2007
RHI closes acquisition of 43.6% stake in Orient Refractories Ltd. India in
March 2013.
Source:RHI annual report,Economic times

48. 



.
ORL is a strategic fit as it strengthens market position in a high growth market
(difficult to access from outside) and has a proven track record of very
profitable growth (high margin products; low cost manufacturing).
RHI: sales 2007-12: 47 => € 102 million (CAGR: >16%); average EBIT
margin~8.5%
ORL: sales 2007-12: 19 => € 44 million (CAGR: >18%); average EBIT margin
>15%
Strategy for ORL
-More than double ORL’s business until 2020
-Push ORL products outside India through RHI’s sales network (esp. Asia,
Middle East)
-ORL will stay a listed company and keep the brand name and the business
model in India.
-ORL gets access to RHI R&D know-how as well as group purchasing conditions.
Source: RHI's analyst day data presentation,Porsgrunn

49. 
The RHI Group has pursued a clearly defined strategy for many years,
which is based on expanding market presence in the emerging markets,
increasing self-supply with magnesia raw materials and an optimized cost
structure.

Continuous solutions which constantly increases the competitive
advantage: that’s what distinguishes RHI and makes it unique.

The RHI Group set ambitious goals for 2020: Revenues of EUR 3 billion
and an EBIT margin of ≥12%.
Particular
Revenue
EBITM
PATM
ROCE
ROE
201212 (in Euro mill.)
1835.7
9.13%
6.18%
13.74%
23.62%
Source:Annual Report 2012

50. 
India has emerged as the fourth largest steel producing nation in the
world, as per the figures release by World Steel Association in April 2011.

The Indian steel industry accounted for around 5% of the world’s total
production in 2010.

Further, if the proposed expansion plans are implemented as per
schedule, India may become the second largest crude steel producer in
the world by 2015-16.

The demand for steel in the country is currently growing at the rate of
over 8% and it is expected that the demand would grow over by 10% in
the next five years.
Source:www.indiasteelexpo.in

51. Source:RHI-AG

53. Current Market Price
Offer Price
Profit Expectation
Cost Of Execution
Return Expectation
37.5
43
5.5
Acquirer's Name
Shares to be acquired( Offer Size)
AcquirPromoters group holding
Old er's Name
Stake acquired from old promoter
No.
Old Promoter holding after open offer
Shares to be acquired (Offer Size) Open Offer31236192
Acquirer's Stake AFTER
Acquirer's stake before Open offer
RHI Group
31236192
RHI 58399665
52380691
Percentage
6018974
26%83616883
52380691.2 43.60%
14.67%
0.25%
14.42%
26%
48.6%
43.6%
5.0%
69.6%

54. Source:BSE India

55. Source:BSE India

58. 
Retail Shareholders:- As seen in Open Offer that all retail
shareholders are generally not aware/take effort to tender shares
in open offer because of documentation process.

Shareholders holding Shares in Physical Form don’t even track
stocks regularly.

Institutional Holders who see long term value in target company.
Examples:-Glaxosmith Consumer ,HUL ,Crisil Ltd.

59. 
With 70% acceptance ratio , the price for the residual shares drops to Rs
25 against the market price of Rs.39 before open offer. In other words,
we can create shares in Orient Refractories at a substantial discount to
current price.

Orient Refractories has become the Indian subsidiary of the world’s
largest refractory player ( RHI AG). At adjusted price of Rs 25, stock will be
available at PE of 7.46x, PB of 4x and Dividend Yield of 4%.

Considering the backing of RHI group (the largest refractory manufacturer
in the world), will give Orient Refractories access to larger international
markets and attractive valuation.

60. Source:nseindia.com,prices are taken
on closing basis.

61. 
Open Offer :- Introduction

Checklist of Open Offer.

Using Open Offer to create cheap shares
Examples from our Investment History:1.Orient Refractories
2.Shanthi Gears
3.Liberty Phosphate

Highly Liquid Vs Illiquid Open Offers
Examples:- HUL , Crisil and Gujarat Auto.
61

62. 
Shanthi Gears Ltd (SGL) was established in 1972.

It’s product portfolio encompasses a range of customized gear boxes, loose
gears, worm gear boxes and helical gear boxes.

Tube Investment (TI) acquired the promoter’s stake (i.e. 44.12%) of SGL for
INR 2.92 billion i.e. INR 81/share.

As a result of the above transaction, mandatory open offer to acquire
another 26% got triggered.

New promoters(TI) announced open offer to acquire 26% on 20 th July.

64. Acquirer's Name
Shares to be acquired(Offer size)
Acquirer's stake before open offer
Acquirer's stake after open offer
Tube Investment of India Ltd.(Murugappa Group)
No.
Percentage
21246122
26.00%
36050291
44.12%
57296413
70.12%

65. Particulars
Tube Investment Ltd.
Preferential Allotment
Conversion of GDR
Total of the above
parties to agreement
Promoter holding
Individuals
Trust
Public Shareholding
Non Promoter Corporate
Retail Public below 1 lac
Retail public above 1 lac
Total Institutions
Non-Resident Indians
Overseas Corporate Bodies
Clearing Member
Trust
Director Relatives & Friend
HUF
Grand total
No.of Shares %Holdings
June End
0
0.00%
0
0.00%
36,050,291
28,950,291
7,100,000
45,665,562
3,890,064
22,397,005
1,739,613
15,345,723
1,222,141
3,053
216,545
3,000
117,328
731,090
81,715,853
44.12%
35.43%
8.69%
55.88%
4.76%
27.41%
2.13%
18.78%
1.50%
0.00%
0.26%
0.00%
0.1%
0.9%
100.0%
No.of Shares
%Holdings
September End
36059741
44.13%
0
0.00%
0
0.00%
36,059,741
44.13%
0
0
0
45,656,112
9582147
17561364
1541486
15126209
831484
3,053
347141
3,000
5000
655228
81,715,853
0.00%
0.00%
0.00%
55.87%
11.73%
21.49%
1.89%
18.51%
1.02%
0.00%
0.42%
0.00%
0.0%
0.8%
100%

66. Assume Tender from various categories of Shareholders:Best
70%
30%
80%
75%
Probable
80%
45%
80%
80%
Shares Likely to be tendered
25,165,228
29,030,597
31,825,445
28,705,539 44,645,743
Total Offer
Surplus /Deficit
% of shares getting accepted
% of shares getting rejected
21,246,122
3,919,106
84%
16%
21,246,122
7,784,475
73%
27%
21,246,122
10,579,323
67%
33%
21,246,122 21,246,122
7,459,417 23,399,621
74%
48%
26%
52%
68
81
0
68
81
32.5
68
81
42
Non Promoter Corporate
Retail public
Total institutions
Total foreign
Purchase
Open offer Exit Price
Value of Remaining Shares
Worst
Actual
90%
50%
85%
95%
80%
40%
84%
83%
68
81
31
Theoretical
100%
100%
100%
100%
68
81
56

67. 
TI is in the industrial chain business, which caters to power transmission
business. Gearbox also forms a part of industrial power transmission. So
acquirer wanted to move up the value chain from the current crop of
chains into more specialized chains and related systems.

TI expected to improve its overall margins as Shanthi Gears operating
profit margin stood at 39 per cent in FY12 compared to Tube’s 10.5 per
cent.

TI expected to increase capacity utilization to 90% in next 3 years from
current 35-40 per cent as Shanthi Gears went slow on low-margin orders.
This is probably why the acquisition price looks a bit high.
Source:Livemint.com,
tiindia.com-investor meet

68.  Investment Thesis: Value Investor Perspective

Our actual cost was Rs 31 per share( against offer price of Rs 81) so we have
invested with long term perspective. Now the Share are traded at Rs.55-60 in
market.

Shanthi Gears EBITDA & PAT margin are 22.81% and 15.01% respectively,
however ROE is low( ~ 11.79%) but that is because of low asset
turnover(Capacity Utilization). Capacity utilization for company was ~ 30% at
time of open offer.

As acquirer is determined to bring capacity utilization from 30% to 90%, asset
turnover is expected to improve that will ultimately increase ROE & margin.

70. Note:- Remaining Market Share Exit Price is taken on the basis of market price of
Share before the open offer announcement.

71. 
Market price of the Share few months before the open offer
announcement.

Fundamentals of Companies on the basis of PE, PB, DCF, Dividend
Yield etc.

Possibilities of synergies being generated by Acquirer in target
company.

72. 
In our calculation for exit price of remaining shares of Shanthi Gears Ltd.
after closure of Open offer is estimated on the basis of following
parameter mentioned below:-

Conservatively took Rs. 48 as exit price in previous slide.

73. Company came up with an open offer on 13th July, 2012. We entered one week
after the announcement @ price of Rs 68 .
Open offer ended on November 2012. Hence, in just 5 months we earned 9%
return on our capital. (Annualized Return~21.6%)

74. 
Open Offer :- Introduction

Checklist of Open Offer.

Using Open Offer to create cheap shares
Examples from our Investment History:1.Orient Refractories.
2.Shanthi Gears.
3.Liberty Phosphate

Highly Liquid Vs Illiquid Open Offers
Examples:- HUL , Crisil and Gujarat Auto.
74

75. 
Liberty Phosphate Ltd. took birth in 1976 and carried out expansion time
to time to enhance its capacity to cope up with the increasing demand.
Now the group is having manufacturing capacity of 7,25,000 MTs. per
annum of SSP fertilizer and 1,65,000 MT per annum of NPK, claiming to
be one of the major SSP manufacturing company in the country known
as 'LIBERTY PHOSPHATE LIMITED‘.

At present, the company is having 14.25% market share of the total
consumption of SSP in the country. The group is engaged mainly in the
production & sales of SSP and also supplies 100% water soluble to the
farmers of Gujarat, Madhya Pradesh and Maharashtra. The group is
importing the same from well reputed manufacturer SQM from Belgium
in loose form and packaging in India in very popular 'Double Horse' brand
before supplying.

76. 
Coromandel International Limited :-
One of the largest companies within the Murugappa Group, Coromandel
International, has been vitalizing the agricultural sector since its inception
in 1964 under the name Coromandel Fertilizers. Today, Coromandel
International is a leading manufacturer and markets a wide range of
Fertilizers, Speciality Nutrients, Crop Protection and Retail.
Coromandel International acquired Liberty Phosphate Ltd. Promoter’s
stake of 62% at Rs. 241 per share and made the mandatory open offer for
26% at same price.

77.  Acceptance Ratio & Profit Calculation Analysis:
Assume Tender from various categories of Shareholders:Best
70%
30%
80%
75%
Probable
90%
40%
80%
80%
Worst
Theoretical
95%
100%
55%
100%
95%
100%
100%
100%
Actual
80%
70%
80%
100%
Shares Likely to be Tendered
3,130,318
3,649,535
4,522,810
5,569,966
4,728,361
Total Offer
Surplus /Deficit
% of shares getting accepted
% of shares getting rejected
3,753,932
-623,614
120%
-20%
3,753,932
-104,397
103%
-3%
3,753,932
768,878
74%
26%
3,753,932
1,816,034
67%
33%
3,753,932
974,429
79%
21%
Purchase
Open offer Exit Price
215
241
215
241
215
241
215
241
215
241
Remaining Market Sell Exit Price
130
130
130
130
130
263.1
48.1
22.4%
244.2
29.2
13.6%
211.8
-3.2
-1.5%
204.8
-10.2
-4.7%
218.1
3.1
1.5%
Non Promoter Corporate
Retail public
Total institutions
Total foreign
Composite Exit Price
Profit
Profit %

78.  Short Term Play in Open Offer:
The Share was trading at Rs.210 after the announcement of open offer at
Rs.241, the gap between prices was Rs.31(14.76%).

Assuming the acceptance ratio (worst case) @ 82%. The stock became
attractive to purchase . We made an entry on that level and within 15
days stock reached Rs.227 per share and we exited after booking 8%
profit.
Source:- Google Finance

79. 
In our calculation for exit price of remaining shares of Liberty Phosphate
after the closure of Open offer is estimated on the basis of following
parameter mentioned below:Pricing parameters before Open offer announcement
Unit
Value
Market price
Rs.
210
Last six month Wtd. Avg. Closing Price
Rs.
159
Last Three Month Wtd. Avg. Closing Price Rs.
170
52 Week High
Rs.
224
52 Week Low
Rs.
46
DCF Value (Intrinsic value per share)
Rs.
109
Average Rs.
153

On Conservative basis we took Rs. 130 as exit price in previous slide.

80. 
As per our calculation the exit price was around Rs.130 but after the open
offer closed, the Share price came down to Rs. 90.

Reasons for sharp fall in price :1. Arbitrageur Selling.
2. No Institutional/Mutual fund Support.

After the arbitrageur selling got over the share price bounce back to Rs. 130
Level.

82. 
Open Offer :- Introduction

Checklist of Open Offer.

Using Open Offer to create cheap shares
Examples from our Investment History:1.Orient Refractories Ltd.
2.Shanthi Gears Ltd.
3.Liberty Phosphate Ltd.

Highly Liquid Vs Illiquid Open Offers
Examples:- HUL , Crisil and Gujarat Auto.
82

83. 
Highly Liquid :- HUL, Crisil Ltd.

Illiquid :- Gujarat Auto Ltd.

84. 
At the time of HUL Open offer, the Share was highly traded and also
available in Future Segment .

Just before the open offer closing date the Share was easily
available at below open offer price. Stock was trading at Rs. 583
against open offer price of Rs.606 per Share.

One could easily earn the return of 3.9% in a month. But Investors
failed to take the benefit because of their low acceptance ratio
calculation but contrary to that all the shares were accepted in the
open offer.

85.  Acceptance Ratio & Value of Remaining Shares
Analysis:Assume Tender from various categories of Shareholders:Best
Non Promoter Corporate
Retail public
Total institutions
Total foreign
70%
30%
70%
75%
Probable
80%
40%
75%
80%
Worst
90%
50%
85%
90%
Theoretical
100%
100%
100%
100%
Actual
28%
15%
39%
42%
Shares Likely to be offered
596,641,893 666,013,221
768,408,937 1,027,622,850
319,563,398
Total Offer
Surplus /Deficit
% of shares getting accepted
% of shares getting rejected
487,004,772 487,004,772
109,637,121 179,008,449
82%
73%
18%
27%
487,004,772
281,404,165
63%
37%
487,004,772
540,618,078
47%
53%
487,004,772
-167,441,374
152%
-52%
583
606
500
567.2
-15.8
-2.7%
583
606
500
550.2
-32.8
-5.6%
583
606
606
606.0
23.0
3.9%
Purchase
Open offer Exit Price
Remaing Market Sell Exit Price
Composite Exit Price
Profit
Profit %
583
606
500
586.5
3.5
0.6%
583
606
500
577.5
-5.5
-0.9%
Note:- Remaining Market Share Exit Price is taken on the basis of market price of Share before
the open offer announcement.

86. 1. Generally, Investors do not tender their shares in open offer if they have
invested with long term perspective.
2. Investors took this bet( Deciding not to participate in open offer) seeing
the parent bullish stance towards Indian FMCG sector, citing parent paid
huge premium for acquiring Shares.
3. Big Investors gave the indication in media that they are not willing to
tender their shares in open offer.

87. 
Like HUL, Crisil Ltd also belongs to a liquid category stock. At the time of
open offer the share was highly traded.

Just one month before Open offer Closing date the Share was trading at
Rs.1120, however open offer price was Rs.1210 per Share.

One could easily earn the return of 8% in a month. But Investors failed to
take the benefit because of their low acceptance ratio calculation but
contrary to that all the Shares were accepted (100% acceptance ratio) in
that open offer .

89.  Acceptance Ratio & Value of Remaining Shares Analysis:Assume Tender from various categories of Shareholders:Best
70%
30%
70%
75%
Probable
80%
50%
75%
80%
Shares Likely to be offered
18,285,367
21,819,514
24,515,777
33,026,260
10,623,059
Total Offer
Surplus /Deficit
% of shares getting accepted
% of shares getting rejected
15,670,372
2,614,995
86%
14%
15,670,372
6,149,142
72%
28%
15,670,372
8,845,405
64%
36%
15,670,372
17,355,888
47%
53%
15,670,372
-5,047,313
148%
-48%
1120
1210
950
1172.8
52.8
4.7%
1120
1210
950
1136.7
16.7
1.5%
1120
1210
950
1116.2
-3.8
-0.3%
1120
1210
950
1073.4
-46.6
-4.2%
1120
1210
1210
1210.0
90.0
8.0%
Non Promoter Corporate
Retail public
Total institutions
Total foreign
Purchase
Open offer Exit Price
Remaing Market Sell Exit Price
Composite Exit Price
Profit
Profit %
Worst
Theoretical
90%
100%
55%
100%
85%
100%
90%
100%
Actual
40%
24%
45%
45%
Note:- Remaining Market Share Exit Price is taken on the basis of market price of
Share before the open offer announcement.

90. 
In Gujarat Auto Promoters Holding was 70.62% and acquirer acquired
55% from promoters and hence had to come up with an open offer for
26%.

On the point of acceptance ratio, it was near to 100% i.e. (70.62%
+26%=96.62%).

Post the open offer announcement, Shares were available in the market
around Rs.1030 per share against the open offer price of Rs.1137 per
share.

So, there was an evident risk free arbitrage of approximately 10%
available in the span of just 2.5 months.

91. Assume Tender from various categories of Shareholders:Non Promoter Corporate
Retail public
Total institutions
Total foreign
Best
Probable
70%
80%
30%
50%
70%
75%
75%
80%
Worst
Theoretical
90%
100%
55%
100%
85%
100%
90%
100%
Actual
60%
27%
50%
50%
Shares Likely to be offered
34,668
54,125
59,723
102,820
29,194
Total Offer
Surplus /Deficit
% of shares getting accepted
% of shares getting rejected
91,000
-56,332
262%
-162%
91,000
-36,875
168%
-68%
91,000
-31,277
152%
-52%
91,000
11,820
89%
11%
91,000
-61,806
312%
-212%
Purchase
Open offer Exit Price
Remaing Market Sell Exit Price
Composite Exit Price
Profit
Profit %
1030
1137
1137
1137.0
107.0
10.4%
1030
1137
1137
1137.0
107.0
10.4%
1030
1137
1137
1137.0
107.0
10.4%
1030
1137
1137
1137.0
107.0
10.4%
1030
1137
1137
1137.0
107.0
10.4%

92. 
If really there was a return of around 10% within just 2.5 month, then
there is an obvious question to be asked.

Why arbitrageur did not take the benefit of the same..??

The only reason was…
“ Thinly Traded (illiquid) Share ’’

But the retail shareholders can take the benefit from these kind of
situations.

94. 
Merely the presence of Mutual funds/Institutions is not enough. Because
if they see the open offer as an “ exit opportunity ’’ then their presence
will not help retail investors any way.
Example: Mahindra Forging Ltd

Critical points to look out for:

Shareholding ( How significant is their investment? )

Their views ( Invested for short term or long term? )

95. 

ShareholdingIf Mutual Funds/Institutional investors have significant holding( like in HUL
30% and Crisil ltd. 26.5%) then they will play a significant role in deciding
acceptance ratio for retail investors.

However, if their holding is insignificant then their presence will not affect
retail investors.

Their ViewsIf the Mutual Funds/Institutional investors have long term view on target
company then they don’t participate in offer, which ultimately increases
the “ acceptance ratios ’’.
Example: -HUL, Crisil ltd.


Even if they tender the shares in open offer they again buy post open offer
at lower price, which gives price support to retail investors.
Example:- Shanthi Gears Ltd.

96. 
Hexaware is India's ninth largest IT exporter with annualized revenue of
Rs 912 crore in FY12. The company is also sitting on cash and equivalents
worth Rs 590 crore.

The Baring Asia Private Equity Fund acquired 41.47% stake in Hexaware
Technologies Ltd. And hence had to come up with open offer of 26% in
compliance with Regulation 3(1) and 4 of SEBI (SAST) Regulations

Company made announcement of open offer on 23-Aug-13. The open
offer price was Rs.135 per share.

Baring Asia manages assets worth $5 billion — provides expansion,
restructuring and acquisition capital to middle market companies.

97. Are they buying from open market route..??

In Hexaware Technologies Ltd. the acquirer after announcement of open
offer started purchasing the Shares from the open market and acquired
approx 8.76% of diluted equity capital.

When acquirer start buying shares from open market, it start changing
the acceptance ratio every time.

98. Please feel free to contact me with any unanswered questions,
suggestions & ideas.
 ashishkila@gmail.com
 +91-9999751327
Perfect Research
T-24A Green Park Extn.
New Delhi – 16
Blog: http://perfectresearch.blogspot.in
Twitter: @ashishkila