Special Situation: Open Offer Analysis – Tata Steel’s Open Offer for Tinplate Company of India and Tata Sponge Iron

Last Friday (15th June, 2012), there was a corporate announcement by Tata Steel. It had announced an Open Offer for two of its group companies – Tinplate Company of India and Tata Sponge Iron.

Seemingly, there was some insider information trading already (hello, Rajat Gupta speaking!) going by the increase in stock prices of both stocks as seen below (courtesy: Moneycontrol)

Tinplate Company of India

image

Tata Sponge Iron

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Of course, nothing can be proved in India and hence we can all rest easy and get back to Insider trading (kidding!).

Anyhow, I was all excited about this Open Offer since the closing price was Rs. 45/- for Tinplate Company of India and Rs. 306/- for Tata Sponge Iron. In my excitement, I wrote up an investment note about this Open Offer. I however didn’t realize that the announcement had come about after market hours and I didn’t consider the impact costs.

Please download the investment note (clicking on the link will automatically start a word document download) Open Offer_Tata Steel_Evaluation that I wrote up for the Open Offer. Even if using this document doesn’t generate any returns currently, it atleast has the framework to work on future open offers.

Looking forward to your comments/insights/learnings from past open offers.

P.S: I had shared this investment note with a few senior investors on Saturday. Thanks to Neeraj and Ankur, I realised that I have to include the following points in that analysis:

a) Consider impact costs. Ankur was a little gentle, saying that I didn’t consider impact costs in the calculations while Neeraj was a little more blunt saying ‘this is theoretically perfect, but practically, the market will not give you a chance since you didn’t consider impact costs’ 🙂 .

b) Tax implications: If and when you tender in an Open Offer, since you don’t pay STT, the gains are subject to taxes (long term and short term). The market will usually raise it up to a level where there is no arbitrage due to the tax angle. This is another angle that I need to add to my Open Offer framework note.

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  1. #1 by Neeraj on June 19, 2012 - 12:54 AM

    Lol..arey sorry yaar, i didnt mean to be blunt/rude..my apologies..
    cheers!
    Neeraj

  2. #2 by Kiran on June 19, 2012 - 11:49 PM

    Neeraj – 🙂 No offense taken at all. It was good learning and you put that blunt statement in your own imitable nice way. Cheers 🙂

  3. #3 by Anil Kumar Tulsiram (@anil1820) on December 17, 2012 - 1:18 PM

    Hi Kiran. Good analysis

    Can you help me to understand little bit more. Apart from annualised return, shouldn’t you look for minimum absolute return to ensure you do not get killed for any adverse movement in market price or any other short term bad news. Eg in Tata sponge or other cases like these when we invest to gain absolute return of 5-6%, then what if the price after rights offer fall more than expected. Don’t you think its better to do some scenario analysis for that downside too and to seek minimum return of 8-10% to take care of any adverse market movements. I have no experience in special situation, just trying to think aloud…

  1. Special Situation – Open Offer Analysis – Brescon Advisors & Holdings « Quest for Value

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