July 4, 2007

Possible arbitrage opportunity ?

I receieved an email on the rumor of the open offer for Lanxess ABS yesterday from mayank. On googling i found the following news item

Lanxess ABS up on open offer hopes

In addition Lanxess ABS has posted the following on their website

Shareholders may take note that Lanxess India Private Limited, Mr Rakesh Agrawal, Mrs Uma Agrawal, Mr Rahul Agrawal, Mr. Vishal Agrawal, Geetganga Investment Private Limited and Tash Investment Private Limited, the promoters of company , have entered into an agreement on June 28, 2007 to sell their share in the Company to INEOS ABS (Jersey) Limited, a company controlled by the British chemical group INEOS. The parties expect the transaction to be completed at the end of September 2007.

So there is a possibility of an open offer. My own intrinsic value calculation is around 300 Rs / share, so even at the current price the stock is available at a 60-70% discount.

However there are some risks
1. The above is still a rumor. Rule no.1 of arbitrage is to avoid getting into such deals based on rumors.
2. Open offer may not be made at a very high premium above the current price ?
3. What happens to the minority shareholder if some decide not to accept the offer ?

I am still trying to analyse the pros and cons on the above. In addition, as i noted in the earlier email, i hold the stock and hence the above post may not be completely unbaised. so please do your own analysis.

Please feel free to leave your thoughts in comments

update : I recieved a comment from ranjit regarding the open offer announcement on BSE. So the open offer is at 201 and for 20% of the capital.

This information changes my view completely. Lanxess ABS holds 51% of the company and other indian promoters hold 19%. As both have agreed to sell out, INEOS would get 70% of the company outright. If the open offer is successful, then they could easily have 90% of the company. I am not sure of the numbers, but i think at 90% they can easily delist the company. So the key point is that investors who refuse to accept the open offer, could in the future be forced to do so. I think company has started doing well and 201 is clearly below the fair price of the company. However the developments are not surprising. This is not the first time an MNC has short changed its domestic shareholders.


Ranjit kumar said...

The open offer was already announced by INEOS at a price 201/- and the share is currently trading at 195/- (3% premium). Refer Bse announcements for the announcement

Ranjit kumar said...

Hi Rohit,

Since the open offer was made on 3-Jul-2007 and since its price is still below the offer price of 201/- there seems to be little hope that the offer price will be revised, however there can be an opportunity when people forget about the offer creating a gap between the CMP and offer price.

Ranjit kumar

Rohit Chauhan said...

thanks for the information, ranjit


Exploring my thoughts said...

Hi Rohit,
I came across this company Divyashakti Granites Ltd. Its financials are-
CMP: 22.3
# of shares: 1 Cr
Debt : Almost 0
PBDIT: 7.27 Cr
Cash & equivalents: 10Cr (Rs 10 per share)
ROCE: 31%

Looking at the above, we have a company selling for 23 Crores, with almost 10 crores in hand and operating earnings of around 35% of market cap.

However I am not aware of what would trigger a price rise of the stocks of this company. Probably a Re fall?

I am not aware of how the Granite Industry works...let us know what you see in this stock/company.


Rohit Chauhan said...

hi vikas
had a quick look at the company ...financials look ok , but the company is too small and i do not have much idea on the economics of this industry..personally i would not invest in the stock

Anonymous said...

hi rohit,
Informative posts on your blog. Just a clarification on Lanxess. Delisting is triggered not necessarily at 90% but also at 75 % (for some companies). Recently FCI OEN connectors had a Reverse Book Building process. The threshold for delisting was 75 % and not 90%. I have checked with Lanxess , the delisting threshold is 75% for it. It changes the dynamics of this situation.