Kolkata: In what looks like a poison-pill strategy to thwart a hostile takeover bid, the Sanjay Dalmia-led management of cigarette maker Golden Tobacco Ltd (GTL) on Monday decided to carve out four of the company’s five key properties—two in Mumbai and one each in Hyderabad and Guntur—for real estate development.
Poison pill is the name given to any strategy that is designed to make a hostile takeover target less attractive to the potential acquirer.
In a notice to stock exchanges, GTL said on Monday it could sell or jointly develop three of its properties—in Guntur, Hyderabad and at Marol in Mumbai’s suburbs. The fourth and by far “the most valuable one”, according to GTL’s managing director J.P. Khetan—the company’s 7.7 acre factory in Mumbai’s Vile Parle area—would not be sold; the company would launch a real estate project there on its own or with partners.
“The assets of the company are being stripped,” said Pramod Jain, a little-known investor from Delhi who in November launched a voluntary bid to acquire 25% of GTL’s shares. At the time of launching his takeover bid, Jain had said he was trying to acquire a substantial equity stake in GTL so that he could secure the company’s assets from being sold by the current management.
“I am planning to move court against the company’s proposal to dispose of its assets because it frustrates my takeover bid,” Jain said in an interview on Tuesday.
Because of “restrictions arising from the ongoing open offer”, the company has decided to obtain shareholders’ approval through an extraordinary general meeting (EGM) for its proposal for real estate development, said Khetan. The EGM will be held on 18 January—the day Jain’s open offer closes.
“This is simply an enabling resolution,” Khetan said. “We aren’t selling all these properties immediately though we do have some proposals.” Development of the 2.75 acre Hyderabad property has already started, he added.
The only important real estate asset that GTL is going to retain is its 50 acre factory at Vadodara in Gujarat, which would continue to produce cigarettes. Founded in 1930 by Narsee Munjee, GTL sells cigarettes under brands such as Panama and Chancellor. In fiscal 2009, GTL posted a net profit of Rs8.5 lakh on a turnover of Rs130 crore.
GTL is a pure real estate play, according to Rajesh Agarwal, director of CD Equisearch Pvt. Ltd—a Kolkata-based stockbroking firm. “The price offered by Jain is 2,020 times the company’s earnings per share of 5 paise in fiscal 2009. This clearly indicates the offer price was based on the value of the company’s real estate assets, and not its business,” he said.
The company was taken over by Sanjay Dalmia, its current chairman, in 1979 in a deal involving top stockbrokers of the time such as Bhupen Dalal and Harish Bhasin.
The Vadodara factory was mortgaged with State Bank of India in May 2008 for a working capital loan of Rs10.92 crore, according to GTL’s filings with the corporate affairs ministry. Another filing shows the 4.77 acre Marol property in Mumbai’s Andheri (East) area was mortgaged with Indiabulls Housing Finance Ltd in November 2007 for a Rs20 crore loan for five years.
GTL’s decision to launch real estate projects follows settlement of court cases between Dalmia and the Indiabulls Group on 14 December—the same day the company issued a notice to stock exchanges saying such a proposal would be considered by GTL’s board on 21 December.
In 2005, Dalmia had secured a line of credit of Rs650 crore from the Indiabulls Group. The lender moved court after it found out that Dalmia did not have clear ownership of a property that he had offered as collateral security. At the time of settlement, Indiabulls claimed Dalmia owed it Rs225 crore plus interest.
Under the 14 December settlement, Dalmia repaid Indiabulls Rs25 crore “within a week” and agreed to repay “a little over Rs200 crore by the middle of April”, according to a lawyer familiar with the terms of settlement, who did not want to be named.
“Dalmia has said in court that he would be selling his 25 acre farm house in Delhi’s Mehrauli area, which according to Indiabulls’ valuation should fetch upwards of Rs200 crore,” the lawyer added.
Gagan Banga, chief executive officer of the Indiabulls Group, refused to comment.
Khetan, too, refused to comment on the court cases with the Indiabulls Group.
GTL’s shares closed on Tuesday at Rs109.50 apiece on the Bombay Stock Exchange (BSE), almost unchanged from Monday, while the bourse’s benchmark Sensex index rose 91 points to 16,692 points.
Under the open offer, Jain had offered Rs101 per share; at that price, the 25% stake that he had bid for would have cost Rs44 crore. He has till 7 January to revise the price of his open offer.
Jain had said he owned 6.5% of GTL’s shares while announcing his open offer. Dalmia and his associates hold 27.19% in the company, according to latest regulatory filings.
Their holding was attached by a court-appointed arbitrator because of the court cases launched by Indiabulls.
After the open offer was launched, GTL’s shares were put in the trade-for-trade (TFT) segment of the National Stock Exchange and BSE to discourage speculative trading.
Under TFT, each transaction is settled separately, which means each trade is settled through delivery of shares.