Defining moment expected for corporate mergers, takeovers (Comment)

There is widespread anticipation regarding possible revision of the threshold limit for mandatory open offers for the purpose of takeovers from current level of 15 percent to 25 percent. If that eventually happens, interesting shareholders’ activity can be expected in several listed companies.

Under the regime of existing guidelines, at the time of the structuring of mergers and acquisition deals, private equity investments and strategic acquisitions, there is a tendency among the investor community to keep their holding tad below 15 percent so that they won’t get attracted with the mandatory open offer requirements.

However, this revision of threshold limit, can come as a blessing and fresh relief to the investors to increase their stake to 25 percent now. For instance, in EIH — formerly called East India Hotels that owns and runs the Oberoi group, ITC currently holds 14.98 percent stake to avoid the open offer requirements.

As soon as this revised guidelines become applicable, they can increase their holding to 25 percent through open market purchases, which can result in a fresh bounce in the stock of EIH.

In the universe of the top 500 companies listed on the Bombay Stock Exchange (BSE), there are at least 98 companies in which single public shareholder holding is between 10 percent and 14.99 percent.

For such investors, this upward revision of takeover threshold limit can give a huge legroom to increase their holdings to 25 percent without a requirement of open offer.

Besides the EIH-ITC combination, such shareholding pattern can be seen in Cairn India, where Petronas holds 14.94 percent, Binani Cement in which JP Morgan holds 14.91 percent and India Bulls Securities in which HSBC Global holds 14.84 percent.

Similarly, General Atlantic holds 14.76 percent in Infotech Enterprises, Warburg Pincus holds 14.64 percent in Amtek India and Blackstone holds 14.63 percent in Allcargo Global.

If these investors decide to increase their stakes to 25 percent, it can lead to renewed demand in these stocks, resulting in fresh rallies thanks to the revised open offer limits.

Further, these new guidelines can also make a significant change in the structuring of future mergers and acquisition deals, private equity transactions and strategic acquisitions.

One more widely anticipated revision is that the open offer size will be revised from the current 20 percent level to 100 percent. If this takes place, then it must be a curtain-raiser for hostile takeovers in India.

This is because, under the current guidelines, the voluntary open offer cannot take the acquirer’s holding beyond 75 percent, making it difficult for anyone to complete the 100 percent buyout.

But if this revision of increasing the open offer size to 100 percent takes place, several hedge funds, private equity funds and limited partnerships must be eagerly awaiting to grab 100 percent ownership of some of the Indian companies, which was not possible under the existing guidelines. They must be smacking their lips in the

anticipation of eventuality of putting their hands completely around the Indian companies.

One school of thought is that it can lead to huge outflow for these investors to do 100 percent buyouts. However, considering the appetite for Indian assets among global investors, it can be reasonably assumed that these investors won’t shy away from such a prospect.

Further, they may not even mind doing such transactions even at higher valuations, as this is the first time they are getting an opportunity to have 100 percent ownership in Indian companies.

If these anticipated amendments finally become rules, it will be a defining moment in the mergers and acquisition, takeovers and private equity deal-making in India.

(18-07-2010-Jagannadham Thunuguntla is equity head of leading brokerage, think tank and market adivisors SMC Capitals. He can e reached at jt@smccapitals.com)