ABB Ltd is the only subsidiary in the ABB Group that is listed. That may not be for long. Following the footsteps of several other multinationals, ABB Group is proposing to hike its stake in the local unit to 75%, from the current 52%. The stated reason is to “facilitate the long-term development of ABB’s business in India”. ABB India’s financials are already consolidated in the group’s numbers.
Thus, the incremental benefit will be only to the extent of the additional 22.9% stake it plans to acquire. Given the parent company’s large size, the incremental contribution will be minuscule.
The 75% limit is the maximum promoter holding allowed in a listed company. If it exceeds this limit, a delisting offer will have to be made using the reverse book-building route, where shareholders determine the price. That makes it expensive. But companies can first hike their stake to 75% through the open offer route, and then make a delisting offer for the residual stake. This two-stage process lowers the total cost of delisting.
ABB Group’s offer price of Rs900 appears attractive, at a 34% premium to last week’s closing price. But it is only at a 14% premium to the floor price as per the Securities and Exchange Board of India’s regulations.
Moreover, barely a month ago, ABB India’s share price was at around Rs860, before falling to Rs680 last week after disappointing March quarter results. Last quarter, sales rose by just 4.5% year-on-year while net profit fell from Rs78 crore to Rs7 crore. After adjusting for forex-related losses, its profit before tax fell 37%. Revenue was hit because the company is implementing large and long gestation projects, which haven’t reached threshold levels of completion for revenue to be booked. Profit was also affected for the same reason, apart from cost overruns in some projects.
If ABB’s performance continues to be poor in the remaining quarters, then its share price will underperform. While the open offer price provides a base, the core business may not support an improvement in valuations. A few things are certain. ABB India’s business is bound to improve as investments in the country’s power and industrial sectors resume due to capacity constraints. Also, ABB India is critical to ABB’s growth plans. Revenue growth in key businesses in emerging markets has been led by India and China. The group’s capital expenditure in 2009 was highest in India, China and Poland. That is an indication of its confidence in its Indian business.
Thus, while there may be some short-term blips, the longer-term picture continues to be bright. That makes it tough for ABB India’s minority shareholders to decide. Depending on the cost of acquisition and the applicable tax rate for each investor, it may make sense in some cases to sell at the market price of Rs830 in the open market, since lower tax rates apply to market transactions. But those who believe that ABB will eventually delist can wait and watch, hoping they get a better price.