Pirmal Healthcare's buyback offer disappointing: Udayan
Published on Mon, Oct 25, 2010 at 09:40 | Updated at Mon, Oct 25, 2010 at 10:01 | Source : CNBC-TV18
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Piramal Healthcare reported muted second quarter numbers for fiscal year 2010. Sales came in at Rs 752 crore—that's a fall of over 24% against the corresponding quarter last year. Net profits came in at over Rs 12,540 crore, but it includes a one-time gain of Rs 16,000 crore from the sale of assets to Abbot.
But the major announcement came outside of the results. The board approves a buyback at Rs 600 a share via tender offer, which was sort of a disappointment for the street that was expecting the buyback to happen at Rs 700 a share. Chairman Ajay Piramal says the company went in for a buyback as it is the most tax efficient option for shareholders than dividend. “If dividend would be given, the shareholders would get only Rs 103 a share, whereas, the buyback will enable shareholders to get Rs 107 a share. In fact even promoters can tender stock in buyback.”
Commenting on the news, CNBC-TV18’s Udayan Mukherjee says, “I don’t understand what Ajay Piramal is saying about tax efficiency etc, because whichever way you dice it, a dividend would have been far more rewarding for minority shareholder.”
Here is a verbatim transcript of Udayan Mukherjee's comments on CNBC-TV18. Also see the accompanying video.
It will fall but people will be quite disappointed with what happen because I remember when the deal happened shortly after that the management made a specific mention of a large dividend and that’s not come through. I also don’t understand what Ajay Piramal is saying about tax efficiency etc because whichever way you dice it a dividend would have been far more rewarding for minority shareholders. It doesn’t matter what element of tax you pay. On a 40% acceptance ratio with Rs 80 above the current market price on a buyback—there is hardly anything that minority shareholders are going to get. A Rs 100 to 140 clean dividends would have been far better even after paying full tax. So it’s disappointing.
Technically, the stock might recoil a bit because people might have had expectations and long standing positions might have been there in the market because of expectation of a Rs 100 plus dividend and people who are holding on for that might actually will be disappointed and they might sell off to a certain extent. So, technically there will be supply at higher levels which comes in. Some part of it came in even before the board meeting because the market had the sense it would be buyback and not a dividend payout.
Where should the stock stabilise? It’s difficult to say because in the near-term it would be demand supply but I guess if you say that the cash on the books is still between Rs 475-500 per share, you discounted by 25-32%, which usually happens and then you add back Rs 90-100 for the a residual business of Piramal, I think you get to a price of Rs 450-470 per share. So the stock fundamentally should have some support around Rs 450-470 cash plus residual business. So it can lose Rs 50 more or lose more and then come back to that kind of level.
But the bigger unanswered question is what does the management what to do with the cash? It’s given back less than 25% of the cash to shareholders that through a buyback so what happens with the remaining. They have had several months to mull over it. The deal did not happen yesterday or day before. Now the management is still completely non-committal about how they want to use the cash which raises the question. All that the management did at that point was to exit at a good price and now it’s finding its way into how to deploy that cash and has not arrived at a decision yet.
So do you want to put your money into that kind of a company where the management is feeling its way into figuring out what it wants to do with the cash without the concrete strategy in hand right now or you are better off saying, “I want to take it and go now. Let the management figure out what it wants to do with this cash, I will figure out whether I want to buy Piramal Healthcare then.” The immediate trigger for which the stock held out above Rs 500 was the dividend which has not come. I don’t think there is any fundamental reason to buy the stock above Rs 450 any longer.
But the major announcement came outside of the results. The board approves a buyback at Rs 600 a share via tender offer, which was sort of a disappointment for the street that was expecting the buyback to happen at Rs 700 a share. Chairman Ajay Piramal says the company went in for a buyback as it is the most tax efficient option for shareholders than dividend. “If dividend would be given, the shareholders would get only Rs 103 a share, whereas, the buyback will enable shareholders to get Rs 107 a share. In fact even promoters can tender stock in buyback.”
Here is a verbatim transcript of Udayan Mukherjee's comments on CNBC-TV18. Also see the accompanying video.
It will fall but people will be quite disappointed with what happen because I remember when the deal happened shortly after that the management made a specific mention of a large dividend and that’s not come through. I also don’t understand what Ajay Piramal is saying about tax efficiency etc because whichever way you dice it a dividend would have been far more rewarding for minority shareholders. It doesn’t matter what element of tax you pay. On a 40% acceptance ratio with Rs 80 above the current market price on a buyback—there is hardly anything that minority shareholders are going to get. A Rs 100 to 140 clean dividends would have been far better even after paying full tax. So it’s disappointing.
Technically, the stock might recoil a bit because people might have had expectations and long standing positions might have been there in the market because of expectation of a Rs 100 plus dividend and people who are holding on for that might actually will be disappointed and they might sell off to a certain extent. So, technically there will be supply at higher levels which comes in. Some part of it came in even before the board meeting because the market had the sense it would be buyback and not a dividend payout.
Where should the stock stabilise? It’s difficult to say because in the near-term it would be demand supply but I guess if you say that the cash on the books is still between Rs 475-500 per share, you discounted by 25-32%, which usually happens and then you add back Rs 90-100 for the a residual business of Piramal, I think you get to a price of Rs 450-470 per share. So the stock fundamentally should have some support around Rs 450-470 cash plus residual business. So it can lose Rs 50 more or lose more and then come back to that kind of level.
But the bigger unanswered question is what does the management what to do with the cash? It’s given back less than 25% of the cash to shareholders that through a buyback so what happens with the remaining. They have had several months to mull over it. The deal did not happen yesterday or day before. Now the management is still completely non-committal about how they want to use the cash which raises the question. All that the management did at that point was to exit at a good price and now it’s finding its way into how to deploy that cash and has not arrived at a decision yet.
So do you want to put your money into that kind of a company where the management is feeling its way into figuring out what it wants to do with the cash without the concrete strategy in hand right now or you are better off saying, “I want to take it and go now. Let the management figure out what it wants to do with this cash, I will figure out whether I want to buy Piramal Healthcare then.” The immediate trigger for which the stock held out above Rs 500 was the dividend which has not come. I don’t think there is any fundamental reason to buy the stock above Rs 450 any longer.
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