Dear Readers,

Special situations are unusual circumstances that a company or its stock can face. These could be turnaround stories, mergers or acquisitions, new products or new business streams being launched or simply stocks that are out of favour. The list of special situations can go on but the real challenge is identifying them.

In the past Special situations have been associated with some remarkable returns and we expect the trend to continue for the very reason that they go un-noticed. Investors tend to steer clear of such opportunities and this leaves enough on the table for investors with uncommon sight.

One such opportunity that we we worked upon in the month of Aug’11 was that of Bang Overseas. We would like to call it The Curious case of Bang Overseas – Find out why!!

As is always the case with Special situations, it’s important to keep a tab on the proceedings and here too the formal proceedings had started from Dec’10.

The Board of Directors of the company in their meeting held on December 23, 2010, approved the Scheme of Arrangement between Bang Overseas Limited (the listed entity) and Thomas Scott (India) Limited (the non-listed entity).

The Scheme envisaged the de-merger of Retail Division of Bang Overseas Limited into Thomas Scott (India) Limited and the company had proposed a swap ratio of 1 equity share of Thomas Scott for every four equity shares held in Bang Overseas Ltd.

The opportunity appeared rewarding to us because Bang Overseas had a good retail network of Menswear and Lifestyle brand Thomas Scott. The retail division of the company was going un-noticed in the composite entity and we were thus confident of the value unlocking.

Looking at the hindsight, we feel that the proceedings went on at a good pace especially considering the fact that with smaller companies delays are a common phenomenon. Bang Overseas could gather the approval of shareholders by 1st Apr’11 (the appointed date for the court convened meeting).

In the anticipation of shareholder’s approval the stock was trading higher at Rs 32-33 than it’s usual range of 25-27, however we deferred our investment operations as High Court’s approval to the Scheme was still pending (it takes about 4-5 months from the date of Equity shareholders approval).

Finally the day of reckoning arrived when company announced on 2nd Aug’11 about the approval to the Scheme of Demerger from the Bombay High Court (from our various past experiences of such cases, the approvals from Bombay High court are usually faster in comparison to hearings in other courts.)

Once the court approved the Scheme, we got active with our purchases in the stock of Bang Overseas as the Record Date in order to decide the number of shareholders eligible for allotment of Equity Shares of Thomas Scott (India) Limited was fixed as 25th Aug’11.

We started buying at the levels of Rs 26-27. Before the ex-date we could manage to buy 5000 shares (used for the ease of calculation) of Bang Overseas at an average of Rs 26.00.

Now here comes the most interesting part of the above investment operation

As mentioned above, we could buy 5000 shares of Bang Overseas at an average of Rs 26.00. We held on to our shares of Bang Overseas till the ex-date i.e. 24th Aug’11. As is normally the case, we were expecting the stock price of Bang Overseas to get adjusted to lower levels on ex-date, thus accounting for the de-merger of Retail division and the reduction in the securities premium account of the company.

To our great surprise the stock held on to the same levels on the ex-date and rather closed at Rs 24.85. We were able to sell off all the 5000 shares at an average of Rs 24.50.

As per the Scheme, we are now entitled for 1250 shares of Thomas Scott India Ltd at a cost of Rs 6.00 per share (26*5000 – 24.50*5000 = 7500. 7500/1250 = Rs 6.00) as and when they go listed.

Interestingly, we never expected our cost of acquisition to be so low. Most importantly, our capital is not blocked except for Rs 7500 (the main concern with such cases is that capital can get blocked for extended period of 6-12 months till the shares of the resulting company get listed).

We expect Thomas Scott India Ltd to list in excess of Rs 20 i.e. around 7 crore market cap, though it remains to be seen since the shares of the same are yet to get listed.

Ekansh Mittal [ekansh@katalystwealth.com]