Minority investors of Reliance Communications Ltd or RCom have reacted pretty much the same way to talks with the MTN Group Ltd as those of Bharti Airtel Ltd did. Shares of both companies lost about 5% after they revealed they were in exclusive talks with MTN.
This is interesting since RCom’s negotiations with MTN are rather different from those of Bharti. If the deal goes through, there is the likelihood of an open offer for minority shareholders at levels higher than the stock’s current price of Rs545.
According to news reports, the deal will be structured such that RCom will end up as a subsidiary of MTN Group.
The South African company could have a stake of up to 61% in the Indian firm, since its foreign holding, which is capped at 74% for the telecommunications sector, currently stands at 13%. This would be done largely through a share swap agreement with Anil Ambani, who owns 66% of India’s second largest wireless services company. The change in ownership of RCom will trigger a mandatory open offer for 20% of the firm’s equity shares.
The pertinent question from a minority shareholder’s perspective is if Reliance shares will be valued at a substantial premium for the swap ratio.
This will lead to an attractive open offer. But note that a successful open offer will limit the shares Anil Ambani can offer in the share swap to 48.6% of the firm’s capital because of the cap on foreign holding. If the open offer is made at a price close to the current levels, the response would be muted and the promoter will be able offer as much as a 60.9% stake in the swap. Based on the current market price of both stocks and prevailing exchange rates, the former scenario will result in a stake of 27.5% for the promoter group in MTN, while the latter will result in a stake of 32.2%. Note that for the deal to be favourable for the promoter group, it’s not necessary that Reliance shares are valued high relative to current levels. They just need to be valued high relative to MTN.
Therefore, it’s unlikely that the expected open offer may happen at a substantial premium. Still, minority shareholders need not be despondent since the average price of RCom shares in the past six months is about Rs610, a near 12% premium to the current market price.
Also, a deal with MTN will brighten the company’s prospects, not only because of its management’s expertise, but also thanks to the improvement in the potential of Reliance’s international network infrastructure (submarine cable).
Punj Lloyd: risk perceptions rise as Singapore arm books losses
Engineering, procurement and construction firm Punj Lloyd Ltd is getting into the habit of springing nasty surprises on investors. The company’s third quarter results were marred by losses booked on legacy orders of the company’s Singapore subsidiary, Sembawang Engineers and Constructors Ltd.
This time, the company’s auditors have appended a qualification to its fourth quarter numbers. Say the auditors: “No provision has been made for losses expected to arise on a long-term contract currently in progress, as the management believes that the contract in question is ultimately expected to break even once commercial negotiations are concluded. If the loss had been so recognized, the effect would have been to…decrease the profit before tax for the year by Rs305.3 crore.” Considering that Punj Lloyd’s net profit for the year till March was Rs359.99 crore, it’s no wonder the stock was hammered after the results were announced.
But the company management has been quick to point out that the amount of Rs305 crore didn’t represent a loss, but the amount in dispute. What came out of the conference call was that the firm’s costs on the project were around £170-180 million (Rs1,417.8-1,501.2 crore), against the original project cost of £140 million. The client has agreed to pay an amount of £15 million by June and negotiations are on to get the rest of the money. The management assured analysts that it expected the contract to be finally closed within the next two quarters at near break-even levels.
Apart from the qualification, Q4 performance has been good, with net sales growing by 37% and net profit before exceptional items rising 32% from a year ago. Net profit was up despite the company having to reverse gains on forex derivative contracts recognized in earlier quarters, in line with the new accounting rules. Ebitda, or earnings before interest, taxes, depreciation and amortization, margins have improved.
Punj Lloyd has been plagued by the legacy orders it inherited after taking over companies like Sembawang, and Simon Carves in the UK. The management said however, that it had acquired these firms for their prequalification status and legacy orders now account for a mere Rs709 crore of its Rs19,600 crore order backlog. That backlog is up from Rs16,000 crore at the end of the third quarter. Margins will improve as the legacy projects get over, because Ebitda margins on them are around 1%, much lower than on the rest of the orders. Around 90% of the orders have escalation clauses allowing the company to pass on input price increases.
The management has been at pains to tell analysts that it is now a global group able to cherry-pick projects. It’s also well-diversified, the latest such move being its entry into the manufacture of defence equipment. The stock, too, has corrected substantially. But the negative surprises have raised the risk for the stock.
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