Dear Readers,

While it feels good to share with you occasional arbitrage opportunities (Note: We cannot share all and the sensitive ones including the likes of Rights issues, tender offers, etc before the record date keeping the interests of our Alpha Plus Portfolio members foremost), we believe it’s our added responsibility to guard you against any opportunities which are fraught with too many risks.

One such case we recently came across is that of Everonn Education Ltd.

Some background into Everonn Education and the Open Offer

On 1st Sep’11, the news regarding the arrest of the company’s Managing Director P. Kishore by the Central Bureau of Investigation in a tax evasion case came out in the public. Within a matter of 5-6 trading days, the stock plunged from a high of Rs 450 approximately to a low of Rs 220-230.

On 20th Sep’11, Everonn Education informed exchanges about the Dubai-based Varkey Group’s acquisition of a 12% stake in the company. The Varkey Group became a co-promoter and triggered an open offer for Everonn, which starts in November.

The price for the open offer is set at Rs 528 a share, a 40% premium over the CMP.

The above may come across as a great arbitrage opportunity for the naive market participants, however we would like to caution against carrying out any operation in this case. This is on account of the following reasons:

  1. The management of the company is doubtful. We believe bad management can cause more harm than a bad company and avoid any investment or arbitrage opportunity in such cases.
  2. It’s important to consider the acceptance ratio in cases of Open offer. As per the announcement by the company the Open Offer is to the remaining shareholders (other than the parties to the MoU) to acquire 4,483,535 equity shares of the company at the price of Rs. 528/-. Considering existing Promoters are the parties to the MOU and they won’t tender their shares, then the acceptance ratio comes at 40%. This means that out of every 10 shares you tender, only 4 will be accepted at Rs 528/- (assuming all minority shareholders tender their shares) and remaining 6 will have to be sold in the secondary market.
  3. By the time the remaining 6 shares are received, the stock may correct back to levels of Rs 280-300, the pre open offer announcement stock level. This is because most investors shy away as they are unsure about the company’s prospects post-open offer and the takeover of the new management.
  4. For instance, in case of Camlin, the stock has retreated back to the same price of Rs 45- 50 at which it was trading before the open offer.

So considering the risks involved and the manipulative management, Everonn Education does not qualify as a suitable risk arbitrage opportunity for us.

Ekansh Mittal – [ekansh@katalystwealth.com]