Capital goods: should minority shareholders exit on buy-backs?

Capital goods: should minority shareholders exit on buy-backs?

Multinational companies (MNCs) in the capital goods industry are increasing their stakes in Indian units through buy-backs or open offers.

A week ago, the Swedish promoter of construction equipment firm Atlas Copco AB, which holds 83.8% stake in the listed Indian subsidiary, offered to buy back the remaining 16.2% of the public holding. If successful, the unit will be delisted.

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Similarly, the German parent of Siemens AG made an offer to buy as much as 19.8% of the company’s stock from other shareholders to increase its stake to 75%. Nearly a year ago, parent ABB Ltd raised its stake in the company’s locally listed entity to 75% from 52.1% through an open offer.

The dilemma for a minority shareholder is whether to bite the bait and sell out, or hold the shares with hope of better returns over a longer term. The dilemma stems from the hefty premium to market price at which the offers are being made. For example, ABB’s offer was at a 34% premium to the prevailing market price. Siemens’ was at a 30% premium to the market price.

The rather desperate attempt to lure minority holders to sell is perhaps a reflection of the MNCs’ intention to capitalize on the growth potential in Indian markets. Compared with other sectors such as pharmaceuticals, MNCs in the capital goods sector are now positioning India as a global sourcing hub. Besides, if one has confidence in the 8%-plus growth in the gross domestic product over the next few years, then the capital goods firms cannot be ignored.

Why sell then? The trick is to be able to evaluate the strength of the offer. For instance, Altas Copco’s initial offer of Rs2,250 per share was at a premium to market price. But the same stands revised to Rs2,750 apiece. Given the premium to the ruling market price, which commands rich valuations (MNC shares trade at one-year forward price-earnings multiples of more than 25), an existing investor would do well in tendering his shares.

Besides, if the public float is low, such as in Atlas Copco, investors may be stuck holding a small number of shares, if the firm delists. Current Securities and Exchange Board of India norms permit companies to delist if the promoter holding is more than 90%. According to Dhirendra Tiwary, assistant vice-president at Motilal Oswal Securities Ltd, “Foreign firms are aligning to their global holding structure wherein subsidiaries are not often listed in their respective countries." They may delist here, too.

The trend is not new. In 2000, Philips India Ltd made an open offer at a hefty 45% premium to the ruling market price and subsequently delisted. Several years later, the firm made another offer for those who held on.

But Lady Luck does not always smile on the minority lot. Share prices, which surge during the open offer, sometimes plunge later. Low-trading volumes or even delisting may make exits tough for the retail investor. Bosch Ltd (in the auto component segment) is one such example. The company made three buy-backs, and thereafter, between April 2000 and January 2002, its share price fell from Rs4,200 to Rs3,800, and then to Rs2,500.

Analysts reckon the capital goods sector is now at the inflection point. Says John Perinchery, analyst at Angel Securities Ltd, “A 100% subsidiary allows for minimum disclosures on new technology and products, ensuring their focus on the core business and greater share in profits after huge expenses incurred on research and development." It’s a reversal of the 1970s era, when Indian foreign exchange regulations made listing of foreign subsidiaries in India mandatory.

Also, at the moment, most firms are sitting pretty on huge piles of cash, and may like to reward shareholders. Siemens for example, has around €15 billion (Rs95,700 crore) in cash. An existing investor can use this opportunity to cash out.

Graphic by Yogesh Kumar/Mint

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