HC sweetener for small Cadbury shareholders

Cadbury India’s minority shareholders are expecting a jump of at least 25 per cent over the chocolate maker’s last buyback offer of Rs 1,900 per share, after the Bombay High Court last week asked for revaluation of the company’s shares based on the discounted cash flow (DCF) method.

In this method, a valuer uses future free cash flow projections of a company and discounts these to arrive at the present value.

“As per our valuations based on DCF, Cadbury India’s shares are worth at least Rs 2,400-2,500 a share,” said Hinesh Doshi, vice-president of the Investors’ Grievances Forum (IGF), which is fighting the case on behalf of minority shareholders. “Minority shareholders are also expecting that the company will pay 15 per cent interest on the amount for the period from September 30, 2009, till it makes the final payment. They are also demanding at least 20 per cent exit premium on the buyback price.”

The matter has seen a legal tussle since late 2009, when Cadbury Plc, the parent of Cadbury India, decided to buy back the 2.4 per cent of company shares with minority shareholders. The latter have consistently refused to settle at the level proposed by Cadbury, which began at Rs 1,340 per share and had approached the HC, which had appointed Ernst & Young (E&Y) to revalue Cadbury India’s shares.

E&Y had recommended Rs 1,743 per share for Cadbury India’s buyback offer in May 2010, based on a comparable companies multiples (CCM) method. This method involves evaluating the value of a company using the metrics of other businesses of similar size in the same industry.

In January this year, Cadbury India had sweetened its buyback offer and had agreed to pay Rs 1,900 per share to the 8,000-odd minority shareholders. However, the latter were not happy and demanded the DCF valuation.

In its valuation report to the court, E&Y had said it had not considered DCF as financial projections were not provided to it by the company. The court has asked Cadbury India to provide this data to E&Y, which is likely to come up with its report before the next hearing, on July 29.

“My back-of-the-envelope calculations suggest Cadbury India’s value is at least Rs 2,500 per share based on DCF. It can even go above Rs 3,000 per share, based on certain assumptions,” said Alok Churiwala, managing director of Mumbai-based stock broking firm Churiwala Securities, who owns 750 shares.