the turn of the millennium, it was a common practice for multi-national companies (MNCs) to take over an Indian entity and de-list it from markets, creating a sensation. India looks to have come a long way since then, especially after 2008, as no one bats an eyelash over MNCs' game plans.
Currently, the newsmaker in this space is one of the world's largest tyre makers, Goodyear Tire & Rubber Co. (GTRC) which wants to de-list its Indian subsidiary Goodyear India (GIL).
This proposal acquires significance as the Indian tyre market is on fire due to the huge growth being generated by the auto sector. The intent may be to fuel an expansion here without having to share the resultant proceeds, especially as GIL has worked its strategies well and is well-placed to benefit in both the the original equipments market and the replacement market.
The indicative price cleared by GTRC was Rs 245 per share, which represented a 33 per cent premium over GIL's closing price of Rs 183.95 as on February 5, 2010 - the route taken will consist of reverse book building and investors need to bid at higher-than-the-floor-price to tender their shares. It triggered a rush for the stock - trading was frozen at 20 per cent on application of intra-day circuit filter at Rs 268. Final price will be determined in accordance with the reverse book building process.
The stock was trading at low valuations in the months preceding the offer. On the day of the announcement (February 5) the stock's P/E multiple was 6.8 times its trailing earnings, which quickly jumped to over 8 times. This is despite the fact that traders factor in the de-listing possibility into the stock prices of Indian arms of foreign companies. P/Es of GIL's peers shows a varied scene: JK Tyres' is near GIL's at 8x, but lower than those of MRF at 10x and Apollo Tyres at 18x.
De-listing plans do go awry. For instance, when Lotte India, a Korean conglomerate's subsidiary, looked to de-list in 2008, it beat a retreat as the discovered price of Rs 825 per share was beyond what it bargained for. The offer reopened in May, 2009, when the price came to Rs 540.
While that does not look like a possibility for GTRC, which holds a 74 per cent stake in GIL, but uncertainty does loom large as markets are racing up. Retail shareholders hold 19 per cent, corporate bodies 4 per cent and institutional investors 3 per cent.
Reasons for MNCs opting to de-list are not hard to find. Their viewpoint is based around the freedom to manoeuvre in an extremely competitive market, which India is and where GTRC's global reach can be used to advantage only if it is answerable to no one. Through de-listing the constant scrutiny to which listed companies are subject can be evaded.
For investors the takeaway may be greater as history shows that firms with good fundamentals revise offers upwards. Also, they must keep an eye on other such MNCs for opportunities, especially if GTRC succeeds: Hitachi Home, Kennametal, Honda Siel Power, BOC, Esab, Gillette, Cummins, Atlas Copco, Honeywell and Alfa Lava.
Voluntary delisting
· Companies are required to obtain prior approval of the holders of the securities sought to be de-listed by a special resolution at a general meeting
· Shareholders will be provided with an exit opportunity by promoters
· If the public shareholding slides to 10% or less of the voting capital, the acquirer, has the option to buy outstanding shares from the remaining shareholders at the same offer price
· Relisting will not be allowed before two years from the date of de-listing
Compulsory De-listing
· Non-compliance with the Listing Agreement, for a minimum period of six months
· Failure to maintain the minimum trading level of shares on the exchange
· Promoters', directors' bad track record, especially with regard to insider trading, manipulation of share prices, unfair market practices
The company has turned sick and is unable to meet debt obligations or to adequately finance operations, and not having paid interest on debentures for the last 2-3 years.
This article was originally published on March 30, 2010.
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