Small shareholders of Gujarat Gas haven’t got a raw deal

Shares of Gujarat Gas Co. Ltd fell by more than 8% after Gujarat State Petroleum Corp. Ltd (GSPC) announced the acquisition of a 65% stake in the company. This gives the impression that minority shareholders have got a raw deal, but, in fact, their position is better than that of BG Group Plc, which is selling its stake at a valuation of ₹ 295 per share. Minority shareholders can tender their shares in the open offer at ₹ 314.17, or 6.5% higher.

add_main_imageIt’s also important to note that until early last week, shares of Gujarat Gas were hovering around the ₹ 295-mark, the price at which BG Group sold its stake. They suddenly shot up to over ₹ 340 on the back of high trading volumes in the last three trading sessions of last week, which could well mean that the market got wind of the acquisition. Some analysts say that shares of Gujarat Gas rose because of the company’s announcement of a ₹ 7 interim dividend, but that can account for only a fraction of the sharp rise in the stock.

Given that the rally was accompanied by more shares changing hands than usually would, stock market regulator Securities and Exchange Board of India would do well to look into the possibility of insider trading, which sometimes explains such spikes in prices and volumes ahead of a big announcement.NextMAds

As far as minority shareholders go, it makes more sense to benchmark both the acquisition price as well as the open offer price against the prevailing market price before last week’s unusual rally. True, the open offer price represents a mere 6% premium over last week’s prices, but investors should also keep in mind that the industry’s fundamentals have changed for the worse this year, and most companies once interested in Gujarat Gas had backed out of the deal. If it’s any consolation, they should note that Gujarat Gas shares have fallen by around 30% in value since BG Group first disclosed late last year that it was looking for buyers.

Given the regulatory concerns surrounding the city gas distribution business in India, it looks like BG Group did not have much choice except to settle for a relatively low valuation.

The Petroleum and Natural Gas Regulatory Board order that sharply cut tariffs for Indraprastha Gas Ltd earlier this year has in general spoiled sentiment for gas companies.

Gujarat Gas’s operating performance, too, has been weak in the past three quarters, due to lower volumes and higher liquefied natural gas (LNG) prices. And concerns on volume growth persist. In this backdrop, it may well make sense for investors to tender their shares in the open offer. As analysts at Prabhudas Lilladher Pvt. Ltd point out: “The exit of BG from Gujarat Gas is likely to erode the management quality premium over the longer term, particularly given the fact that GSPC is a state-controlled entity.”

One silver lining comes from the softening in LNG prices in the recent past and that should reflect positively in the financials. Gujarat Gas is a gas distribution firm and lower gas prices result in a slight improvement in profitability. That said, there are no big triggers for the stock to outperform from a near-term perspective. On the contrary, there is a risk that the regulatory environment could worsen. According to analysts, the fact that BG Group settled for the current price can be taken as an admission that regulatory uncertainties persist.