The Board of Bayer Cropscience made an open offer to
buy back 2,879,746 equity shares of Rs 10 each from all shareholders of
the company at a price of Rs 1,580 per share. This aggregates to around Rs 455
crore.
The stock price of the company, which had closed at Rs
1748.95 on Monday, tumbled 8.65% to Rs 1597.65 on Tuesday after the
announcement, as the indicative buy back price was lower than the prevailing
market price.
While this is being seen as pure buyback by the
company, it is in fact a back door attempt to raise the stake of the promoters
to 75% using the company resources.
It is perfectly legal to do a buyback of shares. And
promoters have used in the past to indirectly hike their stake by resorting to
buyback.
Let’s take an example of a company, which has an
equity capital of Rs 100 crore with promoters holding at 55% and Public holding
at 45%. The company then makes an open offer to buy back 25% of its equity
capital. After the buyback, the company’s equity capital will reduce by Rs 25
crore to 75 crore, if the promoters do not participate. Their
shareholding in the company would go up to 73.33% from the 55%. The public
shareholding will come down to 26.67%.
Investors should note, the company’s cash has been
used for this but the promoter’s equity share holding percentage has gone up
from 55% to 73.33%. From a shareholder’s perspective, this is seen as an
investor friendly move on two counts:
· He gets an
exit.
· The EPS of
the company goes up as the number of shares gets reduced.
But for Bayer Cropscience shareholders, the buyback
price wasn’t attractive as it came at a discount to the prevailing market
price. The company could very well have come out with a higher buy back price.
This is also not keeping in line with the current
trend of the market where MNCs are raising their stakes at a premium to the
market price. Remember Hindustan Unilever, where the Anglo-Dutch parent offered
to raise its stake in the company to 75% at a premium of more than 22% to the
then prevailing market price.
GSK Consumer had offered to raise its stake at a 39%
premium to the prevailing market price.
Bayer may say that we are not raising our stake as
promoters may also participate in the buy back. If everyone participates, then
the share holding pattern will not change. The company is right.
Let’s understand the math here.
The buyback of 28.8 lakh shares of the company
represent just 7.29% shares. If the promoters don’t tender, their shareholding
will go up to 77.10%. This will exceed the permitted promoter holding
limit of 75% and an OFS will have to follow later.
Our sense is that promoters have retained the right to
participate in the buyback just to ensure that they can sell the desired amount
of shares, which will be just enough to ensure that the promoter’s stake is
within the 75% permissible limit.
So this is nothing but a back door way of raising the
promoter’s stake. And this is being done at a lower price than what the market
price was. This is not an investor friendly measure. The company is flushed
with funds after the Thane Land sale last year. The price could very well have
been higher. After all the company was only using shareholders’ funds for that.
Written by VK Sharma
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