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Enhancing value, increasing control

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While the move to buy back shares is aimed at enhancing shareholder value or increasing stake, it’s also an opportunity for investors to exit.

Over the past quarter, a slew of companies have offered to buy back shares from shareholders, albeit for different reasons. While some such as HUL generate enough cash and consider this as a better way of utilising it, some others like are seeing their foreign parent targeting higher control over their Indian arms. Traditionally, companies have used their profits by distributing it to shareholders in the form of a dividend, for expansion, retained it for future use or for enhancing shareholder value by buying back stock. We look at companies which have resorted to this last step and the reasons behind the same. While most of the current open offers are directed at shareholders, companies can also pick up shares from the open market, or make them meet regulations, one of them is also mandated by regulations. While in the first case, the price stated will be paid to the shareholders, in open market purchases the company specifies the maximum price which acts as an outer limit for share buyback. Here is an analysis of the some of the major offers made so far and whether you should subscribe to the same:

ABB
The stock price of ABB jumped by a fifth after its Swiss-based parent announced a buyback to enhance its shareholding in the Indian entity. The move comes a fortnight after the stock tanked to sub-Rs 700 levels due to a dismal March quarter performance which saw its net profit fall 91 per cent while revenues barely grew 4 per cent. Analysts blame it on slow execution, forex related losses and the impact of its exit from the rural electrification business. While the company may turnaround the poor set of numbers over the last few quarters on improving macroeconomic environment, given the current valuations (a hefty 28 times CY11 earnings estimates) and medium-term prospects, the upsides are factored in and investors could subscribe to the offer though the acceptance ratio of 46 per cent means less than half of your shares will be accepted. Alternatively, they could choose to sell in the open market should its share price rise from current levels of Rs 870.

Areva T&D
The global acquisition of Areva’s T&D business by a consortium comprising Alstom Holdings and Schneider Electric and their offer to buy an additional 20 per cent through a cash offer, if successful would take the combined stake of new parents to 90 per cent. However, given that the new promoters will split the businesses, a delisting is likely. On the operational front, competitive pressures and higher raw material costs saw Areva’s margins tank 707 basis points in the March quarter. Analysts have indicated that the going ahead will be tough and the company could see a fall in both revenues as well as profits. Given the current price of Rs 289 is barely 1.7 per cent lower than the offer price and the uncertainty regarding business outlook, investors could just opt to sell it in the open market.


Binani Cement wants to use its cash reserves of Rs 650 crore to buy back about 5 per cent of existing shares to enhance shareholder value. The company’s offer price of Rs 90 is nearly 10 per cent more than the current price. While prospects don’t look too good if low all-India figures of cement despatches for May are any indication, the company, however, is not as affected as others as its key areas of operations—western and northern markets — have shown robust growth. However, the increased supply from the southern to the western market has been a problem area as these have hit its realisations in the third and fourth quarters and continue to pose problems. While monsoon will impact despatches in the next two months, the commissioning of new capacities will ensure that pricing pressures remain going ahead, say analysts. Given the attractive offer price and muted outlook, investors can subscribe to the offer.
 

TAKING THE BUY-BACK ROUTE
  No of 
shares**

Holding (%)

Max offer
price (Rs)
Premium
to CMP (%)
Cost
(Rs cr)
Pre  Post 
ABB 48.5 52.1 75.0 900 4.5 4,365
Areva T&D 47.0 72.0 92.0 295 2.0 1412
Binani Cem. 14.5 64.9 69.9 90 9.9 130
BOC# India 0.9 89.5 100.0 225 28.0 202
HUL# 22.5 52.0 53.0 280 8.9 630

>1.0

59.3 63.0 200 72.0 50
**In million; Holding reflects promoters stake-before and after buyback
Through open market, for others it is from shareholders
 
MIXED SHOW
In Rs cr Net
Sales
% chg
(y-o-y)
Adj
PAT
% chg
(y-o-y)
CMP
(Rs)
Adj
PE (x)
ABB 6,300 -5.9 283 -44.1 861 64.5
Areva T&D 3,465 14.8 143 -42.9 289 48.3
901 60.8 73 41.3 288 33.5
Binani Cement 1,851 24.2 285 162.0 82 5.8
Hind Unilever 17,524 6.4 2,114 -1.4 257 26.9
Manaksia 1,297 -6.0 143 7.7 117 5.7
Net sales, Adj PAT and Adj PE are based on trailing 12 months figures
Source: CapitaLine Plus


Hindustan Unilever is looking to put its cash chest of Rs 2,000 crore to buy back a part of its shares at a maximum of Rs 280 per share. Analysts say that as the company generates over Rs 2,000 crore of cash annually, it makes sense to improve its return ratios through a buy back, rather than be stuck with lower returns from investments in debt instruments. Unilever’s stake in HUL will also increase by a per cent to about 53 if the buy back is done at the current levels. Though the company’s strategy of volume growth and improving market share could come through in the medium term, it is likely to see competitive pressures which might impact profitability. Since the maximum buyback price is 8.5 per cent higher than the market price, and the operation will happen through open market purchases, expect the buyback offer to provide support to its share price. Investors could use this opportunity to exit.

BOC India
Industrial gas maker, BOC India’s promoter group led by Linde AG (owns 89 per cent) is making an open offer to delist the company in a bid to integrate various group companies in the country and improve operational efficiencies. While the minimum price of the delisting offer is Rs 225, investors are unlikely to tender their shares considering that the current quoted price is Rs 287 and the company may have to revise the same. Investors can wait for a better offer or exit at these levels, which is 27 per cent higher than the offer price.

Manaksia
Manaksia, a metal packaging company, plans to use its Rs 500 crore surplus cash to buy roughly 4 per cent of the current equity capital from the open market. The company has indicated that it will continue to buy shares from the market beyond the 10 lakh minimum limit (the maximum is 40 lakh).

Given that the outlook for the sector is good considering the sustained growth in its key demand segments (such as construction), investors could stay put in the stock. At the current price of Rs 116, the stock is trading at 4.9 times FY11 EPS of Rs 23.5.

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