BackMallya, Poddar likely to retain control of Mangalore Chemicals
Deepak Fertilisers' bid is unlikely to get any significant attention as it trails current market price by a big margin
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Kolkata/Mumbai: Benefiting from new takeover regulations, UB Group chairman Vijay Mallya and his partner Saroj Poddar, a Kolkata-based industrialist, are likely going to retain control over Mangalore Chemicals and Fertilizers Ltd, which is the target of a hostile takeover bid by Deepak Fertilisers and Petrochemicals Corp. Ltd, without even having to strengthen their equity control in the firm.
Pune-based Deepak Fertilisers’ ₹ 93.60-a-share bid for Mangalore Chemicals is unlikely to get any significant attention from shareholders because it trails the current market price of the company’s shares by a big margin.
On Wednesday, Mangalore Chemicals’ shares closed at ₹ 100.55 each on BSE, down 2.94% in a flat market. Even in weak markets, it has traded firmly above ₹ 100 from 1 October—the day Deepak Fertilisers’ tender offer and Zuari Fertilisers and Chemicals Ltd’s counter-bid opened for subscription.
The gain in market price was backed by a jump in trading volume in Mangalore Chemicals’ shares, starting 26 September—the day the revised bids were announced by Deepak Fertilisers and Zuari, controlled by Poddar.
On that day, Mangalore Chemicals’ shares jumped 19.95% on BSE to ₹ 88.10 before trading was halted.
On 26 September, trading volume on BSE and the National Stock Exchange combined jumped to 3.2 million shares from 318,088 on the previous day.
Since then, the combined trading volume on the two bourses has ranged from 1.5 million to 5.1 million shares, whereas typical trading volume was less than 500,000 shares.
Under the current takeover laws, both bidders couldn’t have been buying shares directly from the market from 26 September.
Going by its ₹ 288 crore bid for 26% of Mangalore Chemicals’ shares, Deepak Fertilisers valued the company at 15.2 times its 2013-14 net profit. This, according to at least two stock market analysts, is impressive compared with the company’s own historical market valuation and that of its peers.
It is also 14.7% higher than the Mallya-Poddar combine’s counter-bid of ₹ 81.60 a share, but that is of little relevance now because both offers have been trumped by the market price of Mangalore Chemicals’ shares.
Under the new takeover regulations, which came into force three years ago, the Pune-based firm cannot chase the market price by revising its offer, nor can it legitimately acquire shares directly from the market until after its open offer and the counter-bid end on 17 October.
Under changed laws, the last revision to an offer is allowed three working days prior to its opening for subscription, whereas previously an acquirer could chase the market price and buy shares directly through stock exchanges until seven working days prior to the closing of the subscription period.
This is a gap in the new takeover regulations, said Girish Vanvari, co-head of tax and a member of the India leadership team at professional services firm KPMG. It is against the spirit of free market acquisitions and also does not benefit minority shareholders, he added.
The new norms have made tender offers completely toothless, according to a leading corporate lawyer based in Mumbai.
Strangely, in the given situation where the ruling market price is higher than the offer price, any subscription to Deepak Fertilisers’ open offer or the counter-bid could attract scrutiny by the markets regulator, this person said, asking not to be identified. Though there need not be any malfeasance, anybody subscribing to either of the offers may be asked to justify why he/she sold at a discount to the market price unless it is a large holding difficult to liquidate in the market.
A former executive director of the Securities and Exchange Board of India (Sebi), however, defended the change in the takeover laws saying that previously there used to be a great deal of speculative buying in the market in anticipation of a price revision towards the end of the subscription period. A regulator cannot countenance speculative activities, this person said, asking not to be named.
The rationale for changing the regulations was to stop speculation, said Amrish Shah, a partner at professional services firm EY, adding that the process of revising the offer price and size is now more transparent. And if there is any allegation that the market price has been manipulated to benefit of the current management, Sebi should launch a probe, Shah said.
The Mallya-Poddar combine, which controls 38.4% in Mangalore Chemicals, stands to gain from the current situation because Deepak Fertilisers owns only 25.3%. Unless its offer receives substantial subscription, the Pune-based firm will not be able to gain enough voting right to oust the incumbent management. Only a little over 36% of Mangalore Chemicals’ shares are widely held.
In any takeover battle, the acquirer has to anticipate how the market would react to the final offer, said Vivek Mehra, an executive director at PricewaterhouseCoopers. Because the period for subscription to tender offers has been shortened from 21 working days to 10 under the new norms, the acquirer has to take a call on market movement over 13 trading sessions instead of seven previously, he said.
From the standpoint of the acquirer, it isn’t a major change, according to Mehra. The revision only eliminated the confusion created in the minds of minority shareholders when the price was revised several times while the offer was open to subscription, he added.
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