Dear Readers,

If you remember, we got some easy 12-14% return (in just 2-3 months) in the de-merger Risk arbitrage opportunity of Piramal Life and Piramal Healthcare (Search Piramal in the search box for details).

Now, do we have a similar arbitrage opportunity in the case of the proposed merger scheme of IVRCL Ltd and IVRCL Assets & Holdings Ltd.? Let’s find out

Disclaimer: The below article is based on some initial research done at our end. This should not be construed as an investment advise, nor have we advised our members of Alpha Plus portfolio until now. The finer nitty-grities are yet to be determined.

What’s the merger scheme and the swap ratio?

IVRCL has secured approval from the Competition Commission of India for the proposed restructuring of business operations, paving way for amalgamation of IVRCL Assets & Holdings Ltd, with IVRCL Ltd., and the demerger of real estate business into a new company.

Under the proposed merger scheme, the shareholders of IVRCL A&H will be entitled to 5 fully paid up equity shares of IVRCL for every 6 shares held in IVRCL A&H on the record date.

At present, IVRCL holds 75.72% of the equity capital of IVRCL A&H which will be cancelled. Also, upon the scheme becoming effective, the paid-up share capital of IVRCL would see an increase of 3.98 crore shares i.e. 14.90% dilution.

Let’s do some calculations

Current market price of IVRCL A&H (on NSE)  Rs 39.35

Current market price of IVRCL (on NSE) Rs 52.35

As per the scheme of merger, for every six shares of IVRCL A&H, we will receive 5 shares of IVRCL.

Cost of acquisition of 6 shares of IVRCL A&H = Rs 39.35 X 6 = Rs 236.1

Cost of acquisition of 5 shares of IVRCL = Rs 52.35 x 5 = Rs 261.75.

So, we are basically getting an arbitrage opportunity of 10-11%.

Pure arbitrage offering 9% (after expenses) over the next 2-3 months

IVRCL is listed in the F&O space, so one can lock in the spread by going short on IVRCL futures and simultaneously buying IVRCL A&H in the cash segment proportionately (6:5).

Example: The lot size of IVRCL is 8000. So, one can short 1 lot of IVRCL (Mar’12) expiry at 52.50 and simultaneously buy 9,600 shares of IVRCL A&H in the cash segment at Rs 39.35.

Over a period of 3 months i.e. by the record date, this spread should reduce from the current 10.8% to 0-1%, thus offering 9-10% return over a period of 2-3 months

Important: The scheme of de-merger has not yet been approved by High court, so if you perform the operations now and if the approval gets delayed you run yourself against mighty Market risks in the short term.

Ekansh Mittal

[ekansh@katalystwealth.com]