Mumbai: There could be a twist in the story of Inox Leisure Ltd’s acquisition of Fame India Ltd, one that reduces the former’s stake in the latter from the current 50.3% to 44%, and opens the door for spurned suitor Reliance MediaWorks Ltd, according to analysts tracking what is becoming an intriguing takeover battle.
Movie hall operator Fame has two tranches of foreign currency convertible bonds (FCCBs), worth $13 million (Rs60.2 crore) on its books. The larger tranche can be converted into equity at Rs90 per share and the rest at Rs107 per share.
“A couple of things will happen if just the first set of FCCBs get converted into equity. First, Inox’s current majority stake of 50.3% could plummet nearly six percentage points lower to 44.5%,” explained a Mumbai-based analyst with a local brokerage, and “second, the conversion will push up the free float of Fame”.
If these new shares are tendered to Fame’s rival suitor Reliance in its counter open offer, there is a possibility of the controlling stake slipping away from Inox, added the analyst who did not want to be identified given the sensitive nature of the issue.
Reliance’s offer for Fame shares, made over the weekend, is Rs83.4 a share, a premium of 64% to Inox’s offer of Rs51 a share. Both the offers will be open between 1 and 20 April.
To be sure, the conversions will only add shares in the open pool and these could be bought by any investor. But it does introduce a certain bit of uncertainty in what seemed a done deal.
An Inox spokesperson declined comment on how it planned to react to such a situation. Shravan Shroff, Fame’s promoter who has kept a low profile through the fight, didn’t answer calls seeking comment.
Fame’s shares have been volatile in the past three weeks, and have risen 87% since the fight for it erupted. It closed on the upper circuit, or the highest permissible price level for a day, for the first two days this week and then closed on the lower circuit at Rs86.25 on Wednesday on the Bombay Stock Exchange. Shares of Inox, and the benchmark index Sensex closed nearly flat, at Rs73.50 and 16,255.97 points, respectively. Shares of Reliance MediaWorks fell 2.08% to Rs209.20 each.
A second analyst from a domestic brokerage said trading in Fame shares had become so speculative that it is “hard to guess if it will stay above Rs90 or rise as far as Rs107”. The analyst, who too did not want to be identified, said the next call would be Inox’s as it decides between “uncomfortable choices” such as raising its offer price, buying additional shares from the market if the FCCB conversions actually happen, or staying put. The first two choices make the acquisition more expensive for Inox; however, if it lets Reliance acquire shares it will end up having a large shareholder breathing down its neck all the time.
Reliance had a 12.2% stake in Fame currently and has launched a hostile bid for the company. A Reliance-Anil Dhirubhai Ambani Group(R-Adag) spokesperson confirmed the stake holding.
Theoretically, if both FCCBs are converted, Inox’s holding will fall to 42.7% but it is difficult to say how far Fame’s share price will rally.
Inox and Reliance are both interested in Fame because the company has 95 screens. PVR Ltd has 108 screens, the second after Reliance, which has 246 in India and 509 on the whole. The Inox-Fame combine would have 204.
“Such acquisitions can help exhibition companies control distribution territories, cut costs by achieving scale and even bargain harder with film producers,” said Smita Jha, media analyst with audit and consulting firm PriceWaterhouseCoopers, who was commenting on the merits of such deals in general.
The takeover battle is set to get murkier and fiercer. In a late evening statement on Monday, Inox had said it “will consider its options, in the best interests of its shareholders and the shareholders of Fame, at the appropriate time, and in full compliance of all its obligations” and that all the “allegations and insinuations made in the Public Announcement by Reliance...against Inox...are untrue, baseless and misleading, and appear to be an attempt to frustrate the sale of shares between the promoters of Fame and Inox..."
On 8 February, Reliance had claimed that Fame’s promoter Shroff had rebuffed its much higher offer of Rs80 a share for a 43.3% stake and instead sold shares at Rs44-45 to Inox. The company had also claimed that this move of his compromised shareholder interest and lacked transparency. Shroff has said that Reliance never made such an offer in writing.
Meanwhile, Reliance continued to acquire Fame shares. It has also lodged a complaint with stock market regulator, the Securities and Exchange Board of India alleging that there was an undisclosed “pre-existing financial arrangement” between the promoters of Fame and Inox.
Graphics by Ahmed Raza Khan/Mint