An Arbitrage Opportunity (Piramal Healthcare and Piramal Life Sciences)

The arbitrage opportunity is in the price difference due to swap of Piramal Healthcare and Piramal Life Sciences stock. I will not get into the business and financials of Piramal Healthcare. I think Prof. Sanjay Bakshi (here) and Deepak Shenoy (here) have elaborated enough.

What I will highlight though is from the latest annual report of Piramal Life Sciences.

Since being de-merged from Piramal Healthcare Limited (PHL) in April 2007, PLSL as an independent drug discovery & development
Company has made significant progress. The pipeline of R&D programs has increased from nine to twenty four, with nine additional programs moving into Phase I/II clinical trials and two additional program moving into Phase II clinical trials. The development projects from pipeline would need strong financial support going forward. Hence the Board of PLSL has approved the de-merger of NCE Research unit of PLSL into PHL.
Under the proposed de-merger scheme, each shareholder of PLSL will be entitled to one fully paid up equity share of Rs. 2 each
of PHL for every four equity shares of Rs. 10 each held in PLSL. All assets and liabilities of the NCE division will be transferred
to PHL at book value. The herbal products division that markets neutraceutical products to less regulated markets globally will
continue to be with PLSL.

For every four shares of Piramal Life Sciences, we’d be getting 1 share of Piramal Healthcare. Also, the Herbal products division of Piramal Life (although loss making currently) will stay with Piramal Life (and continue to list).

So, what’s the arbitrage opportunity?

As per today’s prices, 1 share of –

Piramal Healthcare (PHL) = Rs. 365/-

Piramal Lifesciences (PLSL) = Rs. 87/- (and hence 4 shares will cost you Rs. 348/-).

Discount if you buy 4 shares of PLSL to convert into 1 share of PHL = Rs 365-Rs.348 = Rs. 15/-

The Piramals are usually known to keep their promises (read Prof. Sanjay Bakshi’s post). So, if you do trust the management to keep their promise of this conversion, you have an arbitrage opportunity to acquire Piramal Healthcare’s business at Rs. 15/- discount to the market price. What’s more – you get the herbal products division for free. It may be loss making currently, but even if the Piramals sell it for salvage value, is that not a benefit?

All this if you believe that PHL is going to generate good returns over the next 2-3 years (and their quarter results have been encouraging).

Disc: I hold PHL (I bought PHL directly. I have just discovered this arb :))

Risks: It may take a while for this merger to go through, maybe 2 months, maybe 4 months. But then, I am not talking of a trading opportunity here. I am invested for 2-3 years, so this arb should work.

(I thought PHL stock was still cum-dividend (of Rs. 12/-) and hence maybe the arb won’t work, but Ayush indicated that it is ex-dividend. And as this chart proves, the stock did go ex-dividend on 28th July. So yeah, the arb opportunity is still there!)

Do let me know if I have missed an angle?

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  1. #1 by Sathvik on August 25, 2011 - 2:22 PM

    Straightforward calculations, yes. Just 1 catch I guess:

    – Piramal life sciences has a negative networth of Rs 290 Crores. Which translates to a per share figure of Rs. 114 for PLSc. Considering 16 crore shares outstanding for PLH, this works upto Rs 18 per share for PLH.
    – Currently Piramal Healthcare seems undervalued…but keeping that aside to be more conservative its balance sheet would get reduced by Rs. 18 as per what it stands
    – If we had the numbers for how much of the merging division contributes to the networth, perhaps we could get to a more closer number.

    Not sure if I am right in my thinking — I am quite new myself to all of this.

  2. #2 by Kiran on August 29, 2011 - 2:57 PM

    Hi Sathvik,

    The herbal products division is indeed burning cash, and most of the negative worth is due to herbal products. Herbal products though will stay with PLSC and not be merged with PLH.

    I guess we would know the exact numbers only in the 2012 AR as management has not given any indication on numbers.

  3. #3 by Siva on December 9, 2011 - 5:25 PM

    hi I have 100 pirmal life, will these shares get converted to 25 pirnal health or will i get bonus 25 pirmal shares having pirmal life shares intact?

  4. #4 by Kiran on December 9, 2011 - 9:16 PM

    You will have 25 Piramal Healthcare and have the 100 PLS intact in your demat after the merger.

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