We would like to bring to your notice an interesting Risk arbitrage opportunity from Alpha Plus Portfolio with a good scope for value unlocking to the tune of 50-70%.
Well there are many undervalued stories out there in the market, both due to depressed market conditions and market negligence. However, what is important is “The Trigger“.
Yes, as has been observed in many cases (some even shared with you), demerger is one corporate action which acts as a strong trigger for bringing forth the hidden/suppressed values (of land bank, business unit, etc.) out on the table.
Most importantly, it expedites the process and lets you know the approximate investment duration.
In any normal value unlocking story, one buys the stocks in the hope that market will some day reward the shareholders. In most of the cases, if you have done your due-diligence well, there’s a high probability that you will be rewarded in the long term, though the time span can vary.
However, at times we come across opportunities arising out of Corporate transactions such as takeovers, mergers, de-mergers, special dividends, rights issue, de-listing, etc. where one can be sure of time-line (2-3 months in most of the cases) within which the desired investment objective can be achieved. These are also to a large extent immune from the regular market risks and volatility.
Well, without diverting from the subject further, please find below the salient features of the risk arbitrage opportunity (initiated on 12th Jan’12)
- The company belongs to a reputed business house of India
- The company has multiple business units and commands a leadership position in one of its business units.
- On the basis of sum of parts valuation, we believe there’s a potential for 60-70% upside from the current valuations.
- On carrying out further sanity check, we realize that the replacement cost of the infrastructure set up by the company could be somewhere around 3 times the current market cap of the company. Also the promoters issued convertible warrants to themselves, convertible into equity shares at a price which is at 15-20% premium to the current market price.
- Most importantly the company has a very good track record and is currently available at a dividend yield of more than 3%.
We believe the demerger of one of its units will act as a perfect trigger for the value unlocking of its various units. Since the company has already received approvals from the following: Board of Directors, Shareholders, Secured Creditors, lenders, etc, only the High Court approval is pending.
As per our talks with the Company Secretary, the High Court approval is expected by late Jan’12 and we thus believe that this is the perfect time for one to start with the gradual accumulation of the stock, because once the company announces the approval from the High Court, there could be a deluge of stock purchases from the informed and the smart investors.
We expect decent returns from our investment operation in this risk arbitrage opportunity and expect the maximum holding period of 2-3 months.
Note:Please stick to the portfolio allocation strategy. Unlike de-listing opportunities, de-merger arbitrage opportunities are susceptible to market risks and can be highly volatile before the High court approval.