April 4, 2006

Arbitrage opportunities

With the market at current levels, I am not finding too many long term opportunities. Maybe my criteria is too stringent. But for my long term holdings I am not too keen to relax them.

In addition there aren’t too many graham type value stocks either. That kind of leaves out only aribtrage opportunities. Although I have not done much on it in the past, I have started looking at this area of investment opportunity actively. Atleast looking at arbitrage opportunites would keep me busy till I find a long term opportunity and hopefully prevent me from doing something foolish (which I may still end up doing)

There two opportunities which have come up. One was point out by amit in the
comments. I also found reference to it on the icicidirect website ( see here )

The first company is infomedia india ltd. This is a buyback offer from the company.

  1. The salient features of the scheme are as under:

  2. The company shall buy back equity shares representing 14% of its paid-up equity capital. The buyback shall be across the board.

  3. The consideration for buy back shall be Rs 245 per equity share.

  4. Shareholders holding less than 50 equity shares per ledger folio / Client ID will have the option to tender their entire holdings over and above 14% of their shares at Rs 245 per share.

  5. The shares so bought back shall be cancelled.

  6. The scheme as envisaged will not affect the shareholding pattern of the company materially.

  7. The scheme is subject to such approvals as may be required including that of the stock exchanges, Bombay High Court, shareholders and creditors.

The buyback is at 245 Rs per share. The current price is 210 per share. So technically there is 16 % return. Let me take you through my thought process on the above offer

ICICI ventures is the major shareholder with the shareholding at around 72 %. So the free float for the stock is 28%, which is 50 % of the open offer. So there is good probability of 50% of the tendered stock being accepted (maybe more).

I have found this
excel arbitrage evaluator . So based on this evaluator, the following needs to be estimated further

  1. Probability of the buyback not happening – looks low at less than 5 %

  2. Closing price after buyback – This is a key variable to figure. As there is a likelhood of 50% or more of the stock being accepted, there rest will have to be sold after the buyback offer. Now one can choose to hold the stock, but that would require more analysis.

  3. Duration of the scheme – looks like 1.5 to 2 months.

I can see a best case return of 40-50 % (annualised, net of expenses) in the above case. The key issue to figure out the downside and whether it can be mitigated by holding the stock for long term(more on that in future posts)

In addition to above, I am looking at two more of the following

  1. EDS bid for Mphasis ( see here ) : No opportunity here, as the offer is at the almost the current market price. But I would like to see if EDS would up its offer (unlikely that the current price will get a lot of response)

  2. Micro inks : I have just been emailed the AR for the company. I am now looking at this company as both a long term opportunity or a possible arbitrage opportunity in the future (if there is a possibility of a buy back or reverse book building by a german co – don’t have much info on it though)

Disclaimer – I am not recommending any stocks / aribtrage on my blog. Even if I am excited or find something interesting, I may not invest any money into it if it does not add up.


Prem Sagar said...

Hi Rohit..
I read in a review somewhere sometime ago that "You Can Be A Stock Market Genius" too talks a lot on arbitrages.
I see that you are reading it already... how is the book?
I am planning to get into balance sheet reading.. on a much more deeper level.. which book do you think serves best?

Senthilnathan N.S. said...

Hi Rohit..

Is there some way that you can make the comments have a different font? They are difficult on the eye and needlessly, much bigger than the content being commented upon.

Rohit said...

let me try to fix the comments. i am not sure how to do it, but will try from my end

abhi said...

That "You Can Be A Stock Market Genius" book is very good practical book. Despite its cheesy name its very good book and it highlights opportunities in stock market that get created not based on investment merits. Although I am not keen on arbitrage myself as these situations,on personal front, I find it hard to predict, but other opportunities like spinoffs( I have had personal success in spinoffs), leaps and options etc in the book are worth understanding and making part of your investing strategy.

Shankar said...

Hi Rohit,

I recall a similar risk arbitrage strategy used by Prof Sanjay Bakshi in th case of Madura Coats, way back in 2001. Am emailing you the ppt now.

Warm Rgds

Rohit said...

thanks shankar, got the ppt. was a good one to read.

prem, i have just started reading the book and agree with abhi's comments. will post about the book once i read the full book

George said...

I've been fairly involved in arbitrage and special situation opportunities at Fat Pitch Financials. I also host a premimium service specifically dedicated to listing special situation opportunities in the US at Fat Pitch Financials Contributor's Corner. The site tracks many of the opportunities listed in "You Can Be A Stock Market Genius".