Takeover Agenda Bared

Reliance is proposing to acquire a 20 per cent stake in the company and take its stake up to about 35 per cent, making it the largest shareholder of the company.

The bid is being made together with its subsidiary Reliance Power Ventures.

The first issue is: will shareholders bite? Individual or public shareholders are unlikely to be enticed by the price, which is Rs 234 per share.

This is because the share price which had hit a high of Rs 392 on March 6, 2000 is quoting at about Rs 255 now. Faced with a situation where Reliance

could not have hiked its stake without triggering off the takeover code, it has complied with the norms.

 

At the same time, it will be bargaining on the fact that investors holding a block of shares in this company may be willing to sell out at a lower than market price. If they came to the secondary market to sell these shares, they could face an erosion in the market price.

Institutions hold the key in this situation and their 35 per cent stake in BSES can make a huge difference. GDR holders are another important category who hold a 18 per cent stake in the company.

The other possibility is if the market stays bearish and the BSES share price dips. Given that Reliance has evinced interest in this counter that too seems unlikely.

Hence, there are just a plethora of possibilities that are evident, and with the open offer due to open only in June 2000 there is enough time for more possibilities to come up.

Where is the logic for the same. Well, for one, Reliance has completed most of its capital investments freeing it of funding requirements. Now, it would be in a cash generating mode which was also one of the reasons why it had announced its decision to buy back shares. Thus, funds are not a problem at the moment.

The other one is quite obvious _both companies have interests in power and telecom. BSES is a key player in the private sector and has about 500 MW of installed capacity and plans to put up another 1,000 MW. The company is the licensee for power distribution in Mumbai and also for 75 per cent of the area in Orissa. Reliance too has interests in power and has projects under various stages of implementation aggregating 6,000 MW.

However, BSES functions as a licensee whereas Reliance has adopted the IPP route. Thus, there is no direct synergy at present. However, BSES' future plans include using the IPP route too.

The other significant area of interest is telecom where BSES's subsidiary named BSES Telecom has set up an ISP service using the existing cable network to lay optic fibre cables to provide Internet connectivity to subscribers. This ensures that it can set up infrastructure at a relatively low cost which improves the profitability and payback period of the project. Thus, by acquiring BSES, Reliance will indirectly gain control over this subsidiary cementing its first acquisition in the ICE sector.

The other division is the engineering, procurement and construction division of BSES which is a sizeable contributor and generates orders for about Rs 800 crore. Reliance could use this capability to implement its own IPPs. The various projects under Reliance's umbrella are to the tune of 6,000 MW.

In sum, Reliance has signalled its intention to take control over BSES. The obstacle is the share price which at this moment stands at a relatively lower price. Its now up to Reliance to convince BSES' shareholders as to why they should accept the open offer at this price.

Novartis India

The global demerger of the agrochemicals of Novartis comes at an opportune time for Novartis India, and will do good to its valuations. The global announcement was made in December 1999 and it was expected to follow in India too. The demerger would make Novartis a focused pharmaceuticals entity which would lead to better valuations.

Getting rid of the agrochemicals business has a double advantage in the current situation. The past few years have seen margins in the agrochemicals business thinning as a result of competition affecting margins. Companies like Novartis with advanced technology from the parent have been producing higher margin products but the going continues to be tough. Recently, it had transferred its Panoli pesticides unit to Hikal Chemicals which would undertake contract manufacture for Novartis. This would improve margins as it would focus only on marketing these products.

Also, the drought in certain parts of the country is bound to have an adverse impact on agrochemical consumption, which is anyway likely to be affected by the lowering of agricultural production estimates. Thus, this business is likely to get more difficult to be in and its divestiture comes at an appropriate moment for Novartis India.