MNCs' buyback rush may open arbitrage gate

MUMBAI: Investors could see some good arbitrage opportunities coming their way, as foreign parents of many multinational companies (MNCs) are expected to hike their holdings in Indian subsidiaries through open offers, feel investment bankers. Anticipating a further improvement in market conditions, these companies may rush with voluntary or delisting offers before valuations become expensive, investment bankers reckon.

Brokerage house Edelweiss Securities has named 10 MNCs which may come out with open offers. These are Atlas Copco, Alfa Laval, Avaya Global, Gillette India, BASF India, Monsanto India, BOC India, Ingersoll Rand, Blue Dart and Oracle Financial Services. ���With stability returning to equity markets, MNCs would like to make the most of the current reasonable valuations for consolidating holdings in their Indian subsidiaries.

Going by the trend observed in the case of recent offers, it appears that the market is ready to make the most of these special situation arbitrage opportunities,��� said Edelweiss Securities in its report ���Master Moves���.
The past trend showed that as soon as a company announces an open offer ��� which is generally at a premium to the prevailing market price ��� investors flock to the counter to buy shares in anticipation of a further rise in the price.

Pricing of open offers has been a major issue among investors, particularly those holding shares for a long time, because of which not many offers could be completed successfully. Some MNCs had to make quite a few attempts to increase their stake in local arms over a period of few years, while others had to increase their offer price to attract shareholders. Novartis and Pfizer are the two latest examples where the acquirers had to hike the respective offer prices. The foreign parents could hike their stake in Novartis from 50.9% to 76.4% (against the proposed 89.9%) after raising the offer price from 351 to Rs 450 per share.

Despite a smart recovery in the market, many MNCs are currently quoting at a substantial discount to their peak values and so could see their parents rushing with offers, feel bankers. ���Hopes of further improvement in valuations could prompt foreign parents of MNCs to acquire shares through open offer. Being cash-rich, most of them need not raise funds to run their operations and would like to eventually delist shares,��� said Almondz Global Securities investment banking head Sharad Rathi.

All the MNCs mentioned above are currently quoting between 14-36% lower than their 52-week highs. For instance, Atlas Copco closed at Rs 616 on Friday, which is 36% lower than the 52-week high price of Rs 960 scaled on September 8, 2008. Swedish parent Atlas Copco Group had made an open offer in 2002, which increased its holding from 51% to nearly 84% in the company. In another notable example, Alfa Laval, where the foreign parent holds as high as 89% stake, is currently quoting at Rs 885, 14% lower than its peak value.