Mark to market | iGate delisting: a win-win deal

Mark to market | iGate delisting: a win-win deal

Technology and operation firm iGate Corp. has managed to acquire minority shares in its Indian subsidiary, iGate Global Solutions Ltd (IGS), without having to pay through its nose.

A number of such delisting plans by multinationals have gone awry because minority shareholders demanded more than their fair value of shares in order to exit.

But in the case of iGate Corp., the exit price of Rs410 per share (arrived through a reverse book-building process) translates into a price-earnings (P-E) valuation of 15.5 times based on current year earnings.

This is almost in line with the average P-E ratio of about 15.1 times for similar companies in the mid-cap information technology (IT) services space. It’s not that shareholders haven’t got a fair deal. Just four days prior to the announcement of the delisting plan, IGS traded at Rs219, or 8.3 times current year estimates.

The exit price represents an 87% premium over those levels. (The fact that IGS shares jumped 45% on higher volumes just three trading sessions prior to the announcement is worthy of the attention of the Securties and Exchange Board of India, or Sebi.

V. Anantharaman, head of investment banking-India, Credit Suisse Group, says: “The deal is a win-win situation for both iGate Corp. and shareholders of its Indian subsidiary. The delisting price is slightly higher than the 52-week closing high price of Rs409 and represents a 42% premium to Sebi’s prescribed floor price of Rs289."

Note that prior to the sharp rise in IGS shares in October, they had underperformed NSE’s CNX IT index by about 30% on a year-to-date basis. This was primarily because of the negative impact of iGate’s exposure to the mortgage industry in the US which had caused its performance to be muted in the first half of the calendar year. But because of the delisting, IGS has outperformed the CNX IT index by 38%.

What helped shareholders demand a premium in the reverse book-building process is the fact that the company bounced back well from the mortgage-related problems in the past quarter. Earnings jumped 127% year-over-year in the September quarter because aggressive cuts in selling, general and administrative (SG&A) expenses and other cost-cutting measures.

In sum, shareholders got a good deal considering that IGS shares were otherwise languishing, and iGate Corp., too, achieved its objective of having just one listed entity in the US without having to pay a valuation that was much higher than peers.

Deccan’s valuation

Shares of Deccan Aviation Pvt. Ltd defy the gravity of business fundamentals. At current levels, the company has a market capitalization of Rs3,610 crore—about half that of Jet Airways (India) Ltd’s valuation of Rs7,340 crore.

Deccan’s revenues in the April-September period stood at Rs950 crore—78% lower than Jet’s consolidated revenues (including JetLite India Ltd) of Rs4,350 crore during the same period. As a result, Deccan’s market cap/sales ratio is more than double that of Jet Airways, despite being less profitable.

True, the recent rise in Deccan’s shares is based on the expectation of a reverse merger with Kingfisher Airlines Ltd. But Deccan’s valuations are expensive even in the case of a merger. According to sources, Kingfisher’s revenues for the April-September period stood at Rs1,150 crore. Including Deccan, the group’s annualized revenues for the period would be Rs4,200 crore.

Based on group revenues, Deccan Aviation’s market-cap/sales ratio works out to 0.86 times, comparable with that of the Jet-JetLite combine, which gets a valuation of 0.84 times annualized revenues. But note that when the merger happens, Deccan will issue shares to Kingfisher shareholders as consideration for the reverse merger.

Even if the merger ratio will be in favour of Deccan shareholders (an unlikely outcome considering that both companies are controlled by the same promoter, who has a lower stake in Deccan Aviation), there will be a large dilution in Deccan’s equity base given the fact that Kingfisher has higher revenues than Deccan.

If Deccan’s current share price is maintained post-equity dilution (that’s the assumption on which investors are buying shares currently), its market cap/sales ratio would end up being much higher compared with that of Jet Airways. There’s little justification for this given Jet’s larger scale of operations and better profitability.

Some news reports suggest that the Deccan-Kingfisher combine will be able to cash in on the approval to fly overseas but international operations are already part of Jet’s business model. There’s little reason for being valued higher than Jet.

The only way Deccan’s current valuations make sense is if one assumes that Kingfisher would be added to Deccan’s kitty without paying any consideration to Kingfisher’s shareholders. The impossibility of this seems to be the reason Deccan shares corrected by 5% on ­Thursday.

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