Dear Readers,

We recently recommended an arbitrage opportunity to our Alpha + members on Sinclairs Hotels’s Buy-back offer at Rs 390/ per share.

The above opportunity was shared with members on 29th Sep’13 when the stock was quoting around 320-325.

We believe, besides investing in stocks of good companies for long/medium term investment, another smarter way of making money in stock markets is to participate in Arbitrage and Special situation opportunities (SSOs)

SSOs constitute opportunities arising out of corporate transactions such as buy-back, de-listing, open offer, rights issue, de-merger, takeover, bankruptcy restructuring, etc. If carefully chosen, these are the opportunities with very high margin of safety because they are to a large extent immune from regular market risks and volatility. At the same time, the holding period in general for such opportunities is 2-3 months.

We would like to share with you details on one such tender buy-back based opportunity recently shared with our Alpha + members and hope the same helps you in identifying and participating in similar such opportunities in future.

The detailed note on Sinclairs Hotels Ltd: Buy-back opportunity that was shared with Alpha + members on 29th Sep’13 has been produced below for your reference.

29th Sep’13: Alpha Plus: Arbitrage opportunity in Sinclairs Hotels (BSE Code – 523023) buy-back offer

Dear Sir,

We would like to bring to your notice an arbitrage opportunity on Sinclair Hotels (BSE Code – 523023) tender buy-back offer.

Note: We believe this opportunity is suitable only for full-time investors as the liquidity is very low and the shares have to be bought through recently introduced Periodic Call auction process.

In the past we have worked on special situation opportunities (ex. Gujarat Automotive Gears open offer) but didn’t suggest because of very low volumes, however this time we would like to share this opportunity as we have many members who can take decisions independently based on their own assessment of risks and reward.

Even if you do not participate, please read the details purely for academic purpose.

Basic Details

Sinclair Hotel Ltd owns and operates hotels and resorts at Siliguri, Darjeeling, Dooars, Ooty and Andamans.

Besides the above hotels and resorts, it is also implementing three Greenfield projects at Kalimpong, Burdwan, and Kolkata. The company’s luxury resort project at Kalimpong as well as the tourist resort project at Burdwan is likely to be commissioned in the current fiscal year.

As far as Kolkata hotel project is concerned, land has been acquired for a 114 room business hotel and construction will start on receiving plan sanctions from concerned development authorities.

Once the above projects are commissioned, Sinclairs will have a room inventory of about 500.

Sinclair Hotels is a debt free company with a net worth of 84 crores and current market cap of 190 crores.

Arbitrage opportunity

On 2nd Sep’13 the Board of Directors of the company approved Buy Back of 4,95,222 Equity Shares (representing 8.16% of the total number of equity shares in the Paid-up Equity Share Capital of the Company) at a price of Rs. 390/- (” Buy Back Price”) through Tender Offer route. The current market price is 320.

It is important to note here that Buy-Back through tender offer route is similar to Open Offer in many respects as against Buy-back through open market purchases.

In buy-back through tender offer route all the shareholders can participate (including the promoters) and the buy-back is on proportionate basis from all the shareholders of the company.

So, in the above case, theoretically only 8 shares out of 100 shares shall be accepted at 390/- per share if all the shareholders participate in the tender offer and 92 shares will be returned back.

However, there are a few important regulations regarding buy-back through tender offer route which increases the acceptance ratio to ~100% in the case of Sinclair Hotels. They are:

  1. 15% of the number of equity shares which the Company proposes to buyback or number of equity shares entitled as per the shareholding of Small Shareholders, whichever is higher, shall be reserved for the Small Shareholders as part of this Buyback
  2. Small Shareholder is a shareholder who holds equity shares having market value, on the basis of closing price on BSE as on Record Date, of not more than Rs 200,000 (2 lakhs)

Applying above regulations in the case of Sinclair Hotels

As the company has proposed to buy-back 495,222 shares, 15% of the same will be reserved for small shareholders i.e. 74,283 shares.

In case of Sinclair Hotels, Small shareholders hold only about 1.3-1.5 lakh shares in the company out of which only about 80,000 shares are in de-materialized format.

So, considering the fact that most of the small shareholders do not participate in such offers, we believe the acceptance ratio for those who participate in tender offer in the small shareholders category could be in the range of 90-100% i.e. if you buy 100 shares at 330 and tender all of them at 390, all 100 shares are likely to get accepted.

Risks/concerns

The buy-back proposal has only been approved by the Board of Directors and the shareholder’s approval is pending. Even if the company dispatches the postal ballot seeking shareholder’s approval in next 7-10 days, it will take around 3-4 months for the above transaction to reach its end.

Delay or shareholder’s approval is not a major issue because even if the transaction completes in 6 months from now, the absolute gains shall be sufficient to take care of opportunity cost.

The only major risk is the cancellation of buy-back programme and in that case the stock is likely to correct to 250-280 odd levels. Agro Tech Foods is the recent case in which company cancelled the buy-back programme however that was because the stock price had already moved above the buy-back price.

We believe the probability of buy-back programme being cancelled is very low; however it is important to keep in mind that in case the buy-back is cancelled, exit would be painful because it will again be through periodic call auction and even lower volumes.

Investment and Exit strategy

The current stock price is 320-325. As the stock is in illiquid category and gets traded through periodic call auction mechanism, we believe one should place a buy order at 330-335 so as to stand ahead in the queue and increase the probability of successful execution of buy order.

Also, the purchase of shares should be limited to 500 shares in one account so as to fall in the category of “Small shareholders”.

As far as exit is concerned, we would suggest tendering your shares in the open offer at 390 because the acceptance ratio is likely to be 90-100%.

Let us know in case of any queries.

Best Regards,
Ekansh Mittal
http://www.katalystwealth.com/
Ph.: 0120-4109766, Mob: +91-9818866676
Email: info@katalystwealth.com