Kapoors may not buy Star out of Balaji

Agreed price of Rs 190/share way above current price of Rs 66.

The Kapoor family of Balaji Telefilms, known best for its television soap operas, is unlikely to buy the 26 per cent stake held by the Rupert Murdoch-promoted Star group in the company after the sharp erosion in the share price of the company.

In August this year, the Kapoors (actor Jeetendra, his wife Shobha, daughter Ekta and son Tushar) had agreed to buy the Star stake at Rs 190 per share. In the last few months, the Balaji Telefilms stock has fallen to almost a third. It closed at Rs 66 on the Bombay Stock Exchange today.

“The promoters of Balaji Telefilms are entitled to purchase these shares. It was not a binding obligation, only an option. We may allow the option to expire,” said a source close to the development. He, however, refused to comment whether the Kapoors would be interested to renegotiate the price: “These things are open-ended and it is too early to comment.”

At Rs 190 apiece, the Kapoors need to shell out Rs 322 crore for the 25.99 per cent stake. The agreement expires on January 18, 2009. “After the due date, Star is free to sell in the open market but not to Balaji Telefilms’ rivals,” the source said.

Star had bought into Balaji Telefilms a few years back, when it was making programmes exclusively for the Star general entertainment channels. Once the exclusivity ended, Star decided to sell its stake. As the Kapoors hold 40 per cent in the company, they decided to buy the shares held by Star and thwart any possibility of a takeover.

If somebody else buys the Star stake, it will have to come out with a 20 per cent open offer to comply with the takeover regulations of the Securities & Exchange Board of India. Thus, some experts said, Star could parcel out its stake to more than one buyer. When asked if the Kapoors have the first right of refusal at every price level, the source said: “I presume so.”

However, Star cannot transfer the rights and covenants it currently enjoys under the agreement. “These covenants are not transferrable. Also, It does not make an economic sense to buy at such a high price when the current market is below Rs 70 per share,” the source said. Balaji Telefilms CEO R Karthik refused to comment on the issue.

At the current price, the company’s total market capitalisation is Rs 430 crore and the 40 per cent of its promoters is worth Rs 172 crore. “In case the Kapoors decide to buy these shares at 190 per share, they will incur huge losses as investors are not willing to buy at that price,” the source added.

The decision to allow the agreement to lapse has seemingly been taken by the Kapoors following failed negotiations with some private equity firms such as New Silk Route and New Vernon Capital, the source said. They were in discussion to divest between 20 per cent and 25 per cent stake. “Given the current price of Rs 66, which is largely due to the financial turmoil, the private equity firms were reluctant to acquire at Rs 190 per share,” he added.