Unsuccessful delisting bids: Euphoric investors get a reality check

INEOS is the latest to see stock tank after failed move

Lapping up shares of companies, which intend to delist, is one of the favourite trade on Dalal Street. If the delisting bid goes through, the trade can be very rewarding. However, an unsuccessful attempt can cause agony to investors.

Specialty chemicals firm INEOS Styrolution is the latest example of the latter. Its stock has almost halved since July 24, when the German parent decided to reject the delisting price discovered through the so-called reverse book building process (RBB). INEOS joins half a dozen other domestically listed companies that have seen stock prices tank after unsuccessful bids. over the last few years.

This holds a lesson for investors, who have placed aggressive bids on delisting-bound companies. Currently, London-headquartered Vedanta Resources is looking at taking its India unit Vedanta private; private equity firm Barings and also Gujarat-based Adani Group are looking to delist Hexware Technologies and Adani Power, respectively.  There is constant speculation over which domestic multinational company (MNC) will be the next to go private.

“The moment delisting is announced, the share price of the respective company shoots up. Gullible retail investors lap up the stock thinking foreign promoters will offer whatever the market price is. Most foreign promoters have become smart; they reject the bid if the price is too high,” says G Chokkalingam, founder, Equinomics.

 

 

Recently, Morgan Stanley analysed past trends with domestic delistings.  It found on average, successful delistings have taken place at a premium of 38 per cent to the price quoted prior to the announcement. Some firms have even paid more than double the price. Whenever a delisting bid has failed, the stocks have fallen average 50 per cent from the peak attained after the announcement.

 “In our analysis of unsuccessful delisting attempts in India over the past few years, we note either the premium expected by public shareholders was too high (three-four times the pre-announcement price) or there were not enough bids received in the reverse book building process for the delisting to go through. In either case, the stock price pared its initial gains and traded towards pre-announcement levels (in most cases),” says Morgan Stanley in a note.

Market players said investors need to be realistic with the pricing to ensure the delisting bid is successful. At the same time, they should ensure promoters pay fair value. “The basic lesson is no to lose sight of the historical valuation. You may give a 20 per cent premium to the historic price-to-earnings valuation. You can't give a 100 per cent premium,” says Chokkalingam.

Earlier, the delisting framework was in favour of investors. As a result, they ensured they got their pound of flesh from promoters. However, following industry lobbying, Sebi eased the delisting framework, levelling the playing field between shareholders and promoters. 

It has introduced concepts, such as “counter offer”.

Experts said investors shouldn’t be get swayed by delisting and only buy a stock if they find it attractive.

“Companies cancel delisting when they think the discovered price is a very high price. Investors take share prices high assuming the company will accept the any discovered price.  One should not buy a stock because there is a delisting; one should buy if he/she likes the price,” said Jyotivardhan Jaipuria, founder, Valentis Advisors.