Dear Readers,

What if I offer your 10-12% return on your investment, over the next 3 months, on almost a risk free basis? (Well there’s nothing like risk free, even the Govt. bonds, considering the debacle in countries like Greece, however certain investment options are considered to be risk-free in nature including the Govt. backed bonds.)

Considering the fact that a lot of investors are running behind bond issues offering 8-9% annual post tax returns, I am sure most of you reading this would willingly opt for the above opportunity (who would like to miss an investment opportunity with annualized returns of 30-50%), obviously after carrying out your due diligence.

Recently National Highways Authority of India’s first sale of retail bonds received bids for nearly five times the base amount, capitalising on investors’ appetite for safe havens. Power Finance Corporation (PFCs) bond issue also witnessed a similar participation. The bonds issued by PFC carry a coupon of 8.2 per cent and 8.3 per cent for maturity periods of 10 and 15 years, respectively. NHAI had offered 8.2 per cent and 8.3 per cent for similar tenures.

Well investing in bonds (risk free to a large extent. NHAI bonds govt. backed) adds stability to your portfolio, however besides investing in bonds one can consider special situations like de-listing of a company, or other special situations because these too, are to a large extent risk free (if carefully chosen) and offer high returns to the tune of 30-40% annualized, on an average.

There’s one such interesting Risk Arbitrage opportunity, that we would like to bring to your notice:

APW President Systems Ltd (BSE Code: 590033)

APW President Systems is a case of de-listing and we believe this is a good case with very low risk profile and offers annualized returns to the tune of 35-50%.

Some insights into the Arbitrage opportunity in APW President Systems Ltd

On 26th Nov’11, APW President in its letter to Stock Exchanges informed that the company (APW President”) received a letter from Schneider Electric South East Asia Ltd, the Promoter and the majority shareholder, informing the company of its proposal to voluntarily de-list the equity shares of APW President from all the stock exchanges by acquiring up to 1,512,006 equity shares held by the public shareholders representing 25% of the current issued and paid up share capital of the company.

The letter also stated that the Delisting proposal has been approved by the Board of Directors of the Promoters at a price not exceeding Rs 195/- per share. (CMP Rs 185/- per share), thus effectively setting Rs 195 as the floor price.

Some important details

Earlier in Jan’11, i.e. about a year back, Schneider Electric entered into a share purchase agreement with the existing promoters of the APW President Systems Ltd for purchase of the promoter shares. The company subsequently made a mandatory Open Offer in Mar’11 to acquire 1,209,600 shares constituting 20% of the share Capital of APW President Systems Ltd at a price of Rs 195/- per share.

Interestingly the shares were tendered at Rs 195/- per share and Schneider Electric could mop up another 20%, increasing their total holding in the company to 75%.

We believe this is a very low risk profile de-listing case. Find out why?

  1. The Promoters i.e. Schneider Electric South East Asia hold 75% equity in the company. For the reverse book building offer to be successful, the promoters need to garner at least 15% in the process.
  2. In the case of APW, 15.16% equity in the company is held by persons and groups who were earlier a part of Promoter group. Since, they now belong to a group of Public shareholders, the shares tendered by them will help in the successful execution of the Reverse Book Building process.
  3. Before the de-listing proposal, the stock used to trade in the range of Rs 120-130, while the indicative offer price by Schneider Electric is substantially high at Rs 195.
  4. In the past, the stock has never surpassed Rs 200-210, so the indicative offer price of Rs 195 is a good deal for all the public shareholders.
  5. During the open offer in Mar’11 at Rs 195, Schneider Electric could easily garner the complete 20%, thus indicating Public shareholders willingness to tender their shares at such a price. We thus believe that even this time, the company will receive thumping approval to its delisting proposal.

Our expectations from this Risk arbitrage opportunity

In Risk arbitrage opportunities, it is important to ensure that there’s not much time gap between one’s purchase and the record date/reverse book building date, as the case may be.

APW has already received the approval from the Board of Directors. The Postal Ballot has been dispatched to shareholders for their assent/dissent to the delisting approval and the results of the same will be announced on 30th Jan’12. Though we believe that the company will receive the due approval, however we would suggest waiting till 30th Jan’12 before starting the process of accumulation.

The stock is currently trading in the range of Rs 183-187, while as mentioned above the Promoters have indicated Rs 195 as the fair price for the de-listing process. This effectively sets the floor price for the de-listing.

The important question is that what could be the Discovered price/Exit price for the de-listing.

Well, we believe and as has been observed in the past many de-listing cases, the Promoters are willing to pay up to 10% more than the fair price (Rs 195 in this case) indicated by them. In this case, we expect the price to inch up to Rs 210-215 during the reverser book building process and expect Schneider to willingly accept the same.

We derive our optimism from the following facts:

  1. Since Schneider’s successful open offer at Rs 195 in Mar’11, the Indian currency has depreciated by approx. 20%, thus Rs 230-235 at present is equivalent to Rs 195 (in dollar terms) they paid in Mar’11.
  2. Even if the currency had not depreciated, Schneider will probably not suspend the delisting for a mere sum of Rs 3 crores (15 lakh shares at Rs 215 = Rs 32.5 crore, while 15 lakh shares at Rs 195 = Rs 29.5 crore), considering the group’s annual turnover of Rs 1 lakh crore.

So, what should be the investment strategy:

  1. Buy in the price range of Rs 183-187 and below, post shareholders approval i.e. 30th Jan’12 (only if they approve).
  2. Book complete profit @ Rs 210-215 (in case the stock price attains the mentioned levels during the reverse book building process) by selling your shares in the open market.
  3. In case the stock does not reach the above mentioned levels, tender your shares in the reverse book building process at Rs 210. Your shares will be accepted at the exit price fixed by the company.


Ekansh Mittal [[email protected]]