Who will end up with the controlling stake in Great Offshore Ltd, India’s largest integrated offshore service provider?
Both Bharati Shipyard Ltd (BSL) and ABG Shipyard Ltd (ABG), two leading private shipyards in the country, seem to be ready to stretch themselves to any extent to own Great Offshore, a strategic fit.
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The fight for a listed company with competing offers to its investors is not new, but what sets the Great Offshore saga apart is the fact that the difference between the offers and counter-offers is quite wide. Also, with every counter-offer made by ABG, BSL—the first mover—is consolidating its financial gains even if it chooses to give up at a later stage.
BSL, which now owns a 19.48% stake in Great Offshore, is just 6.52 percentage points away from the magic figure of 26%. Under India’s companies law, an entity holding 26% plays a crucial role in influencing board decisions and virtually enjoys management control—as long as it is the single largest holding.
At Rs532.20 a share (the closing price on the Bombay Stock Exchange, or BSE, on Friday), Great Offshore’s market capitalization is Rs1,976.59 crore. BSL acquired its 19.48% stake for Rs243 crore. The value of this is now Rs385.04 crore, about 72.59% of BSL’s own market capitalization. If BSL wants to own 26% in Great Offshore, it will need to buy an additional 6.52%. This will cost BSL about Rs128 crore at the current market price. If it does this, the company’s per-share acquisition cost for a 26% stake will be Rs387, a 27% discount to the current market price.
In other words, BSL is spoilt for choice—it can gain management control at a price lower than the current market price or reap a hefty capital gain by selling its stake, if it chooses to do so.
BSL has outstanding new building orders worth Rs1,200 crore from Great Offshore for a jack-up rig, used for exploratory drilling, and a multi-support vessel, also used for offshore oilfield services.
This is possibly the first instance in India where a company is bidding for management control of a customer that is much larger than it in terms of revenue and profit as well as market capitalization. In Europe, it is common for shipyards to own shipping firms. They do so for effective utilization of their building and repair slots.
Flashback to 1999
Open bidding for management control is not new to Great Eastern Shipping Co. Ltd, or GE Shipping, India’s largest private sector shipping company, of which Great Offshore was a division until recently.
GE Shipping has undergone corporate restructuring twice since its founding in 1948 by Vasant Sheth, a sugar trader, and A.H. Bhiwandiwala, a financier and the first chairman of the company.
On both occasions, the firm spun off its specialized business divisions into separate companies to diversify risk and hedge against the volatility in the earnings of the shipping business. The new entities were subsequently raided by outsiders, and the promoters lost both control and ownership.
In 1999, the real estate division was spun off into a separate company, Gesco Corp. Ltd. For every 10 shares of GE Shipping, one share of Gesco was issued. Hence, the shareholding pattern in Gesco, headed by Ghanshyam Sheth, a cousin of Bharat Sheth, currently deputy chairman and managing director of GE Shipping, mirrored that of the parent firm.
Abhishek Dalmia of New Delhi-based real estate firm Renaissance Estates Ltd made an offer in October 2000 to buy 45% of Gesco at Rs23 per share after acquiring a 10.5% stake from the market. Dalmia thought the value of Gesco’s land bank and properties in Mumbai and Bangalore far exceeded its market price. Besides, a low promoter shareholding made it a perfect takeover target.
Under the takeover code of capital market regulator Securities and Exchange Board of India, or Sebi, any entity that buys 15% of any listed company is required to make an open offer to buy at least another 20% from the public. It also needs to have its offer document vetted by the regulator.
Dalmia made the open offer before reaching the 15% mark, and raised the offer price to Rs27 per share even though there was no counter-offer.
The Sheth family faced the prospect of losing control over Gesco as the promoter holding was a mere 13.5%, identical to its holding in GE Shipping. Fearful of losing control over Gesco, the family sought the guidance of Deepak Parekh, chairman of India’s largest mortgage firm, Housing Development Finance Corp. Ltd. Parekh extended a line of funding and Mahindra Realty and Infrastructure Developers Ltd of Mahindra and Mahindra group, along with the Sheth family, jointly mounted a counter-offer for 33.5% of Gesco at Rs44 per share.
The Washington-based International Finance Corp.—an arm of the World Bank—which owned 6.34% of Gesco, sold its stake to the Sheths. Dalmia gave up and agreed to sell his 10.5% stake in the company for Rs16.35 crore (at Rs54 per share, higher than the offer price) and in the process made a Rs9 crore profit.
Cut to 2006
The offshore division of GE Shipping was hived off into Great Offshore under the stewardship of Vijay Sheth, another cousin of Bharat Sheth. This time, for every five shares of GE Shipping, investors got one share of Great Offshore and four shares of GE Shipping.
Once again, the new entity’s stakeholding pattern was a mirror image of that of GE Shipping. Wiser for the earlier experience, the Sheths by this time consolidated their family holding to around 24% through the so-called creeping acquisition route and two share buyback schemes floated between 2000 and 2005. Under Sebi’s creeping acquisition formula, promoters can buy up to a 5% stake in their company every year from the market.
But the bulk of this holding was owned by K.M. Sheth, current executive chairman of GE Shipping, and his immediate family, consisting of Bharat Sheth and his younger brother Ravi Sheth, the company’s executive director.
Two other factions of the family, Asha Sheth (wife of the late Vasant Sheth) and Sudhir Mulji, had around a 4% stake each, while Vijay Sheth’s holding was only 3%.
Since the stakeholding patterns of both firms were identical, Vijay Sheth owned 3% each in Great Offshore and GE Shipping. To tighten his grip on Great Offshore, Vijay Sheth wanted to have a comfortable holding and the only way to do this was to buy out the stakes of other family members. He decided to do this by raising money in his personal capacity. He wanted to raise his stake from 3% to 15%.
At the first stage, he sold his 3% shareholding in GE Shipping to his cousins (at an undisclosed price) and used the money to buy part of their holding in Great Offshore. The price he paid for each share was Rs850—much higher than the market price of Great Offshore, but it was in accordance with an independent valuation following a Sebi formula that takes into account past financials, price to book, net asset valuation as well as price-to-earnings multiples, among other financial ratios. It was done before Great Offshore was listed on the stock exchanges.
Vijay Sheth also made a futile attempt to increase his shareholding in the company by declaring a share buyback of up to Rs60 crore in March 2008.
The money Vijay Sheth got by selling his holding in GE Shipping was not enough to buy 12% in Great Offshore. He needed another Rs300 crore.
Pledge of shares
Infrastructure Leasing and Financial Services Ltd (IL&FS), one of the country’s leading infrastructure development and finance companies, and Motilal Oswal Financial Services Ltd, a Mumbai-based brokerage, stepped in to fund the buying, accepting shares as collateral.
Vijay Sheth pledged 14.89% of his stake to raise the loan, but he was required to bring in more shares as additional security when Great Offshore’s share price dropped. He failed to do so, and IL&FS and Motilal Oswal threatened to sell the shares in the open market in December 2008. A desperate Vijay Sheth sought the help of an old friend and a long-term business associate of Great Offshore—P.C. Kapoor of BSL.
Kapoor cleared the debt, taking the 14.89% stake as a fresh pledge. When Vijay Sheth defaulted on his interest commitments to BSL, Kapoor invoked the pledge and acquired the 14.89% of Sheth’s stake on 6 May at Rs315 per share.
Vijay Sheth and his immediate family still hold around 0.75% in Great Offshore.
From then on, the drama unfolded quickly. On 30 May, Vijay Sheth resigned from his post as vice-chairman and managing director, and the company virtually turned into an orphan with no identifiable promoter. Without wasting any time, BSL decided to go for the kill as Great Offshore could have been raided by someone else.
Even though BSL had less than a 15% stake, on 3 June it announced its intention to acquire an additional 20% stake at Rs344 a share. The offer was to open on 25 July and close on 13 August.
ABG has been eyeing Great Offshore as a potential strategic fit. The offshore services industry has fixed long-term charter hire contracts with Oil and Natural Gas Corp. Ltd, Reliance Industries Ltd, Gujarat State Petroleum Corp. Ltd and many other oil exploration firms, and hence has stable cash flow not affected by the economic environment.
In contrast, shipyards are starved of regular cash flow, as 30% of their billing comes from the government in the form of subsidy.
In February, the cabinet committee on economic affairs cleared the proposal of payment of 30% subsidy on ships contracted up to August 2007, but no money has yet been received. According to a 30 June ABN Amro research report, ABG has to receive government subsidy of Rs1,700 crore, and BSL, Rs1,000 crore.
ABG and Eleventh Land Developers Pvt. Ltd, a group company, started buying shares of Great Offshore from the market as early as February at an average price of Rs250 per share. On 23 June, the ABG group of companies of Rishi Agarwal, nephew to the Ruias of Essar Group, who already owned 2.13% of Great Offshore, made an offer to acquire 32.12% at Rs375 per share.
Under Sebi norms, counter-offers are to be made within 14 days of the offer. The ABG offer was to open on 13 August and close on 1 September.
ABG’s counter-offer caused BSL to press the panic button, and it quickly acquired a 4.58% stake from the Bharat Sheth family. The family sold a majority of its personal stake in Great Offshore to BSL at a market price of Rs403 a share on the day ABG made the counter-offer. This made BSL the single largest shareholder in the company with a 19.47% stake. Its average cost of acquisition is Rs335 a share. On 4 July, BSL revised the offer price to Rs405 per share.
ABG was not to be left behind. On 30 July, its investment bank, Kotak Mahindra Bank Ltd, revised its offer to Rs450 a share. This was done before ABG acquired a 5.19% stake in the company at an average price of Rs449.99 per share through two block deals from two mutual funds, Sundaram BNP Paribas Asset Management Co. Ltd and DSP BlackRock Investment Managers Pvt. Ltd.
ABG followed this up by acquiring an additional 0.38% stake at around Rs498.39 a share on 3 August and, finally, on 5 August, revised its offer price to Rs520 per share. ABG, along with persons acting in concert, owns a 7.87% stake in Great Offshore, with the average cost of acquisition being around Rs399 per share.
There is another twist to the tale. On 8 August, Asha Sheth sold around a 0.65% stake in Great Offshore through a block deal to AAP Investments, an investment company based in New Delhi, at Rs554 per share. It is not known whether AAP Investments has bought the stake on behalf of either of the two firms.
Subsequently, Asha Sheth also sold her entire stake but the identity of the buyer is not known.
The last act
What can happen now?
Until now, the open offers have been academic in nature because Sebi has not yet cleared them. The regulator is expected to clear them this week and also fix the time frame for the opening and closing of the offers. This means that both BSL and ABG would administratively proceed with their respective offers to shareholders that have to start and end on a common date.
Theoretically, BSL can buy up to a 20% stake in Great Offshore at Rs403 a share and raise its holding to 39.48%. ABG, too, can buy 32.12% at Rs520 a share and push up its stake to 39.99%. Neither of them need go this far, as a 26% stake will give them management control.
Since the current market price is higher than Rs520, investors are unlikely to sell their shares. Great Offshore has a wide free float and high retail ownership, about 54%, while institutional stakeholders, including foreign institutional investors, hold around 6%, insurance firms around 10% and mutual funds, 2%. The retail investors will always look for a higher price, so both BSL and ABG will have to raise their offer prices.
Even at the current market price, for ABG, the cost of securing management control will be about Rs360 crore. This will make the average acquisition price Rs495 per share, a marginal discount to the current market price.
For BSL, the per-share cost of acquiring management control will be Rs387, a 27% discount to the current market price. It has the inherent advantage of being an early bird and acquiring a substantial part of the stake at a low price.
Once they get Sebi’s nod, the two firms will either raise the offer price or will start buying from the market directly. With bulk purchases, prices will rise further, and it will turn into an open auction for Great Offshore between the two bidders.
BSL has the option of selling its entire 19.48% holding to ABG, demanding significant control premium. Similarly, ABG too can sell its 7.87% stake to BSL.
Whoever attains the 26% stake first will win management control. Investors won’t complain as they would benefit from an aggressive price discovery exercise by the two raiders.
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In the run-up to the final act, quite a few things are happening.
Life Insurance Corp. of India has been buying BSL shares from the market. It has raised its stake from 1.14% on 31 March to 9.67% on 30 June. It bought more shares on 8 July, and now holds a 12.71% stake in BSL.
Meanwhile, BSL’s promoters, after getting shareholders’ approval in May, made a preferential allotment of 2.74 million convertible warrants at Rs80 per share to themselves. Post-conversion, the promoter shareholding in the company will go up by 5.52 percentage points to 44.47% over the next 18 months. The BSL stock closed at Rs192.40 per share on Friday.
Things are happening on the ABG front too. The company is eyeing Western India Shipyard Ltd, a financially weak firm.
In a corporate filing with stock exchanges on 25 August, Western Shipyard said that as per the directions of the Bombay high court, a meeting of the shareholders and secured creditors will be held on 26 September for approving a “scheme of compromise and arrangement” between Western Shipyard, its creditors and shareholders and ABG.
The secured creditors—suppliers and lenders—have been requested to write off a fair amount of their dues. This is the first step towards cleaning up the balance sheet of Western Shipyard. ABG Shipyard had earlier expressed interest in taking over the management of the firm. This will help ABG have a significant presence on the west coast.
P.R. Sanjai contributed to this story.