ABB Power open offer: What sparked it and why small shareholders are sore

ABB Power Products and Systems India is in the news due to a controversy over its open offer price. Here is an explainer on this issue:

What triggered the open offer?

The open offer was triggered by indirect acquisition and change in control at ABB Power. In December 2018, Swiss firm ABB made a global announcement pertaining to the sale of its power-grid business to Japanese conglomerate Hitachi. The $6.4 billion deal gave Hitachi an 80.1 per cent stake in ABB’s power grid unit and an option to take it to 100 per cent. As part of the deal, Hitachi and ABB would set up a joint venture in which ABB would spin off its power grid business. Pursuant to this, ABB’s domestic unit ABB India set the ball rolling on hiving off the power business into ABB Power Products and Systems India, which got listed in March.

When was the open offer announced?
 

The open offer was announced on March 30, the day ABB Power got listed on the NSE and BSE, following the demerger. The open offer is being made jointly by ABB and Hitachi, the promoters of ABB Power. The open offer is aimed at acquiring the entire public shareholding of ABB Power at a total outgo of Rs 917 crore.

How was the open offer price arrived at?
 

Since ABB Power was only listed in March this year, the often-used formula of one-year weighted average price preceding the date on which the transaction was announced wasn’t applicable. As a result, the open offer price of Rs 851 per share was arrived at based on valuation reports dated March 24, 2020 issued by Bansi S Mehta and Ernst & Young. The price was further increased to Rs 865.92 as the acquirers decide to pay interest of 10 per cent per annum for the period between March 30, 2020 (date of open offer announcement) and June 02, 2020 (date of publication of detailed public statement).

Why are minority shareholders unhappy?
 

Minority shareholders of ABB Power want the open offer price to be sweetened. They want the promoters to pay interest from December 2018, when the deal was originally announced. This would increase the open offer price by another Rs 125 per share. Some investors have approached the market regulator, Securities and Exchange Board of India (Sebi), to direct the company to revise upwards the open offer price. The regulator is currently reviewing the transaction.

What is ABB’s take on the controversy?
 

“The open offer price was determined in full compliance with Sebi regulations. At the time of entering into the SPA (sales and purchase agreement) on December 17, 2018, the intrinsic valuation of ABB’s power grids business in India was not determined. At that point of time, ABB Power was not in existence as it was one of the business segments of ABB India. As a result, it only became subject to stock exchange regulations on March 30, 2020, when ABB India was listed following a demerger process in full compliance with NCLT requirements,” the company told Business Standard.