Monday, May 6, 2013

Post Delisting Options

Some time back we had made a case link for avoiding the delisting theme since we thought the current regulations are 1) flawed and 2) significantly favourable to promoters.
We note that now the delisting bubble has largely burst with serious investors generally more appreciative of the risks in the space. We continue to regularly consider though some interesting strategies that the regulations provide POST the success of the delisting offer and announcement of the discovered price by the acquirer.

The first strategy is that of cigarbutt investing which we have already written about in our post. Taking the example of Chettinad Cements where the stock is temporarily trading post success of delisting offer. While the accepted delisting price is at Rs 720/, you can still buy the stock at ~ Rs. 695/- and tender to the acquirers giving you an absolute return of ~ 3.25% (assuming one side transaction cost of 0.35%).

Also as per the regulations, the acquirers need to give residual shareholders an exit window of 1 year at the same delisting price. Operationally, those who tender by a certain cut off date every month (to be announced after all approvals are in place and stock stops trading), are paid off by a certain date next month and so on. Based on time taken for previous delistings, we expect the entire process to get completed by 15th June (at the earliest) or by 15th July (most likely). Thus, by tendering at the first available opportunity, one can generate between 15% to 25% per annum. Since the risks are extremely low, we compare this strategy to returns from a 3 month Fixed Deposit yielding 7-8% at best. Looks interesting for those seeking to spice up their fixed income returns!!

The second opportunity is to think like a PE investor and buy shares and remain a continuing shareholder in an unlisted enterprise. Suitable only for those with a very high appetite for risk, this strategy if at all should be considered only in specific circumstances like
  • The business has been delisted at a large discount to intrinsic value and you expect this to get unlocked in some manner. Examples could be expectations of a future sale of the company or a large dividend payment from existing cash reserves. So for example, while bordering on speculation, one could argue that in cases like Amrit Banaspati, Carol Info or India Securities where the delisting happened at a discount to net cash on books this is a possibility, since promoters might want to strip the excess cash off the company books at some point of time.
  • You expect the business to do very well in the future and throw up large amounts of Free Cash Flow. You might thus want to remain a shareholder in anticipation of healthy future dividends combined with some form of unlocking.
  • The most important consideration for both the above is the management. Management should be of impeccable quality and unquestionable ethics. While most of us might not be disciplined enough to only buy into listed companies which as Buffett says “You’d be perfectly happy to hold if the market shuts down for 10 years”, when it comes to evaluating unlisted investments, we have no choice. And hence we think that this strategy can be employed only in the ‘rarest of rare cases’. It is difficult if not near impossible for us to envisage the existence of management in which minority investors can repose such blind faith. For an interesting discussion on this subject have a look at this.

A combination of the both the aforesaid alternatives and our love for preserving optionality led us to a third strategy while thinking about Chettinad Cements.  This approach involves buying shares and not tendering at the first available opportunity but waiting it out for upto one year to tender (Since regulations allows an exit to all shareholders upto a year from the date of delisting).

If during the course of the year, some dividend comes along or some form of value unlocking happens, then investors can hit a jackpot. This low risk strategy is akin to buying an American Put Option since the exercise price is fixed at the delisting price, the period is fixed for one year after which the option lapses, you have the option to tender anytime during the year (American option) and lastly the premium you pay is fixed at the opportunity cost of letting your money do nothing for 1 year less the returns made on the cigarbutt. So for instance if a company with large net cash delists and your opinion is that promoters have stretched their pockets/borrowed to pay for the delisting, you may choose to employ this strategy in hope of a good dividend in the first year. Of course naysayers would legitimately argue that chances of a positive outcome are low. However we think that this could be an interesting strategy especially if the residual shareholding % is very low leading to small leakage for the promoter. In any case the approach appeals to us given the low cost lottery ticket nature of the trade.

Chettinad Cements – To do or no to do?

So where does Chettinad Cements stack up on strategy 2 & 3?? To start with, we were surprised that the promoters chose to delist a significantly capital intensive business. This in our view could be because 1) The promoters intend to sell off the business at a premium in the near future or 2) Capex is over for the company and the business is expected to throw up larger free cash flow in the future which is not yet reflecting in the price.

Our basic research on the company leads us to believe that it is the latter ie Chettinad is likely done with its capex for the time being and FCF is likely to improve over a period of time on the back of rising capacity utilisations.

So does this make for a case for creating a put option like in strategy 3? We think not. This is because as per the annual report, the promoters are keen to pump money from the cement business into their power business leaving little hope for any large dividend inspite of improving FCF. Certainly not in the first year given that there is still some leverage on the books.

Is there a chance for holding on for a longer period of time as in strategy 2, we are not sure given the capital intensive nature of both the cement and the power business. Also cement in general has had a good run for the last couple of years and we aren’t that good at predicting cycles.

To conclude, to us in the case of Chettinad Cements the cigarbutt strategy is the only one of appeal as an alternate to fixed income investing.

Best of Manufactured Luck!!


  1. Hi ml
    Nice analysis... thanks a lot for the different sides of a delisting procedure...
    One doubt though as i am new to delistings...
    If i purchase shares of chettinad how will i have to tender the shares....
    And for what reasons can the offer can get delayed?
    And why market can ignore such opportunities...
    Thanks in advance...

    1. Thanks Pratik,
      Post the success of the delisting offer, the company would make the final application to the stock exchanges. After the exchange approval, the stock would stop trading. This would be intimated through a notice by the exchange. The company would then give the residual shareholders by means of a letter of offer the choice to tender shares at the same delisting price for a period of 12 months as well as the process of payment. Its tough to say as to why the market is currently ignoring such opportunities. Maybe it is because no firm timelines are stipulated as per the regulations for the above proceedure. Generally though we have seen it take between 2-3 months and see no large risks.

  2. Hi ML,

    It would be great if you can write about your thoughts on the HUL open offer. I tried some rough calculations and wasn't able to make a proper case for either selling or buying at CMP!


  3. Hi,

    I agree with you, that buying a stock after delisting process is like buying a stock along with free put option. but i would like to share my experience in such scenarios

    a) The market for delisted shares is very hallow with very high bid / ask spread.
    b) Many company have also tried innovative ways to buy such shares at a pittance (Cadbury and many more)
    c) Many company which are delisted are transacted at a very steep discount to intrinsic values ( Bharti Enterprises, Essar Teleholdings to name a few)
    d) Also if some RTI / Complaint is filed against delisting process alleging ambiguity, then it will take long time to get money back. ( Nirma (I got money after 6 months), India Securities)

    I agree that Chettinad Cement is availiable very cheaply to its worth, but I doubt you will get upside in short time, I also feel that Chettinad RBB was managed (Do visit my blog for details "") and If SEBI looks through the matter minutely, it can be a long battle. Also you can take that positively as if it is a white swan? In short, buying shares after delisting process requires patience and deep pockets (You should be able to forget that money).


    Jigam Gandhi

    PS : I am not buy shares from market to be able to sell it in offer for minority share holders, maybe because I am afraid that these RBB is rigged and it may invite SEBI warth. In such case my return will diminish (Maybe I have a hindsight bias of my money being struck in Nirma)

    1. Hi Jigam,
      Good to have your views. We agree with you on the point that it may not be rewarding to hold Chettinad. It is probably best to tender at the first available opportunity. On playing the cigarbutt however we prefer to look at things a bit differently. So for example even if it takes ~ 6 months as in the case of Nirma & India Securities (which we dont think it will), returns will still equal fixed income alternate opportunities.

  4. another good read for me today, very interesting cases of arbitrage are covered

    waiting for your next post