On May 21 2012, Canada’s Fairfax Financial Holdings Ltd had signed an agreement to acquire Thomas Cook Group 76.69% stake in Thomas Cook (India) for Rs 817 crore. Fairfax Financial Holdings (Prem Watsa is a well known value investor), the parent company of Fairbridge Capital, has been strategic investor especially in the insurance sector. In collaboration with ICICI Bank, the company had created ICICI Lombard, one of the largest private insurance players in India.
Subsequent to the stake sale, as per SEBI regulations, whenever there is a change in promoter (or more than 25% stake is acquired), the acquirer has to come up with an open offer. And they did. 24.17% stake at Rs. 65.48 per share. The offer closed on July 25th, 2012. And post offer public announcement here.
Sl.No. 7.9 in that announcement is very interesting. The acquirer holds 87.1% stake in Thomas Cook (India). All delisting fans should get excited by this percentage. According to SEBI’s delisting deadline, the group has to either delist before June 2013 or reduce their % shareholding to 75% or below. Given the spate of delisting offers (and at exciting prices) (and these guys are just 2.9% away from 90%), is there a possibility of delisting? Or will they reduce their shareholding to below 75%?
Thanks to Ashish Kila, who forwarded me the Delisting and Takeover code document (the new rules, effective October 2011), the answer is that (with 95% probability*) Fairbridge has to reduce its stake to 75% or below. What are the exact rules?
If maximum permissible non-public shareholding exceeds, say 75%, pursuant to open offer – the acquirer is required to bring down his or her shareholding to 75% within the time specified as per SCRR (Securities contract regulation rules).
The acquirer, whose shareholding exceeds 75% pursuant to an open offer, cannot make a voluntary delisting offer under the SEBI Delisting Regulations, for one year from the date of completion of open offer.
The second point clearly illustrates that Fairbridge Capital cannot come up with a delisting offer since the date of completion of open offer was July 25th 2012 and one year later, the deadline would have passed.
Ergo, Fairbridge has to reduce its stake to 75% or below. Current holding of Fairbridge is 87%. 12% dilution to go (which is a fairly large block of shares). If I were holding Thomas Cook (India), there is an avalanche of shares that could hit the market any time and hence I would sell at this moment.
*I said with 95% probability since two things can happen –
a) SEBI can extend the delisting deadline for all companies. Nobody knows what SEBI can/will do. This delisting theme is quite a speculation that is going on.
b) Fairbridge is not an inexperienced investor. Far from it. They would have obviously known that they have to dilute their stake (I think Fairbridge acquired the stake at Rs.50/- per share from Thomas Cook Group) to 75% or below before the deadline. Or, or get an exception from SEBI. Some legal loophole which might allow them to hold on to their 87% stake and also do a delisting. I wouldn’t know.
Given that, on an expected value basis, this remains a sell at these levels.
Disclosure: I don’t hold the stock (neither did I ever buy it). This post is only for analysis and educational purposes. Kindly do not take this advice as buy/sell recommendation. Please do your own due diligence before acting upon any of the information in this site.