We recently recommended an arbitrage opportunity to our Alpha + members on Claris Lifesciences Ltd (BSE Code – 533288) Buy-back offer at Rs 250/- per share.
The above opportunity was shared with members at an average price of 182-184 (after accounting for dividend of Rs 9/- per share)
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 Claris Lifesciences Ltd: Buy-back opportunity that was shared with Alpha + members has been produced below for your reference.
Alpha Plus: Arbitrage opportunity in Claris Lifesciences Ltd (BSE Code – 533288) buy-back offer
We would like to bring to your notice an arbitrage opportunity in Claris Lifesciences (BSE Code – 533288) tender buy-back offer.
Note: Please read the entire note to make an independent assessment of the risk reward ratio in this opportunity.
On 7th Jan’14 the Board of Directors of the company approved Buy Back of 9,250,000 Equity Shares (representing 14.49% of the total number of Equity Share Capital of the Company) at a price of Rs 250/- (” Buy Back Price”) through Tender Offer route.
Besides, the Board has declared an interim dividend of Rs 9/- per share and has fixed 20th Jan’14 as the ex-date for the same. So, all those who buy Claris Life sciences before 20th Jan’14 will be eligible for the dividend.
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 14 shares out of 100 shares shall be accepted at 250/- per share if all the shareholders participate in the tender offer and 86 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 ~60% in the case of Claris Lifesciences. They are:
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
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 buy-back, of not more than Rs 200,000 (2 lakhs)
Applying above regulations in the case of Claris Lifesciences
As the company has proposed to buy-back 9,250,000 shares, 15% of the same will be reserved for small shareholders i.e. 1,387,500 shares.
In case of Claris Lifesciences, Small shareholders hold about 29-30 lakh shares in the company.
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 50-60% i.e. if you buy 100 shares and tender all of them at 250, around 60 shares are likely to get accepted.
Remaining 40 shares will have to be sold in secondary market and we expect a price of 120-130 for remaining shares.
Cost of investment of 100 shares (100 is being used for ease of calculation. Make allocation as per your portfolio size) at 182.5 (avg. of 4% allocation at 187 and 2% at 172) (I) = Rs 18,250
Probable gains if one participates in tendering process
Payment from the company assuming 60% acceptance at Rs 250 (A) = Rs 15,000 (60*250)
Proceeds on selling remaining 40 shares at Rs 120 (B) = Rs 4,800
Total Proceeds (A + B) (D) = Rs 19,800
Absolute gain (D – I) = Rs 1,550
Time frame – around 2 months
We have assumed 60% acceptance ratio. The actual ratio will be known only once the entire process is over and in case of lower acceptance ratio our returns will diminish.
We have assumed Rs 120 as the selling price for residual shares and the actual selling price will again be known towards the end of this opportunity. Market may assign lower valuations against our assumption of 650 crores market cap (~11 times expected PBT).
Let us know in case of any queries.