Going back, going home, going bankrupt
Saturday, June 27, 2020 by Finshots
In this week’s wrapup, we talk about Vedanta, delisting, and the greatest scandal of 2020 (Wirecard). So hold on to you share certificates, because this is going to get bumpy.
From Public to Private
It’s inevitable now. We are in the midst of a slowdown. Markets are volatile. Investors are spooked. One gentleman, we spoke to recently confessed he was switching to fixed deposits altogether. The dread is real.
And all this has culminated in rather spectacular fashion at Vedanta Limited — a mining company specialising in extracting iron ore, zinc and aluminium.
Now if you are new to the metals and minerals space, know this much. Global demand for these things has been pretty weak. Producers have been flooding the market with cheap metal. And as basic economic axioms would dictate, prices have deteriorated quite a bit and Vedanta’s margins have suffered in tandem. In fact, last quarter they made losses to the tune of ₹12,521 crore.
Investors were already embracing for this eventuality. But then COVID hit us.
And now — Who knows when global demand will recover? Who knows when prices will turn around? Who knows when Vedanta will mount a comeback? So investors have been extremely skittish. In the meantime, Vedanta’s share price tanked. 2 years ago it was trading at ₹345. Last month it was languishing at ₹80.
It was bad.
But then it provided a rather unique opportunity for the company’s promoters to do something very… opportunistic.
They had a chance to take the company private.
Reverse the IPO. Delist from the Indian stock markets completely.
But it's easier said than done. After all, the promoters (owners) only own 51% of the company right now. Outside shareholders own the rest 49%. Regulations stipulate that Vedanta will have to own at least 90% of the company to delist. Meaning they need to entice other shareholders to part with their stock. And that’s no easy feat.
First, you have to get the board of directors to approve this little scheme. The promoters on the board will obviously vote to delist. The independent directors — not necessarily. But in Vedanta’s case everybody sort of went along. So that’s an O.K.
Then, the company will have to declare a floor price. It’s the minimum price at which the shares will have to be bought come delisting. Calculating this price is complicated. We won’t get into that. But know that this price tends to reflect the average trading price of the stock over the past 6 months.
And since Vedanta’s stock price was pretty beat up this last year, the floor price was set at ₹87.50. Meaning the company could theoretically buy back shares at a pretty low price. And there are some material upsides here.
If they expend as little cash in the process of buying back shares, they could take the company private and access a whole host of benefits. They won’t have to keep pumping out regulatory disclosures. They won’t have to seek consent from other shareholders. They could get away with a lot of things simply by turning private.
More importantly, Vedanta could potentially tap into resources that might not have been accessible otherwise. S&P, the rating agency recently said delisting might help the company to improve its “credit profile and refinancing options.” They’re basically saying — “Yes, the company will have to shell out a lot of money in buying out other shareholders. But once they go private, the company can keep its profits as opposed to shelling half of it to outside shareholders (through dividends). This could possibly improve the company’s financials (cashflows) and help them borrow more money”
And since bankers take cues from the "good" folks at S&P, it’s possible Vedanta and its promoters have a lot to gain here, if they manage to go private with a low floor price. However, Vedanta still has to get other shareholders to approve this scheme via a special resolution. They’ll have to put it to vote and 67% of the public shareholders will have to concede. That won’t be easy, right?
2 days ago, Vedanta’s public shareholders approved the scheme as well, with a 93% majority.
But it’s still not over. Not yet. These shareholders can fight back and sometimes they fight back with incredible tenacity.
Once the delisting is approved via the special resolution, investors can demand anything above the floor price whilst opting to sell their shares back to the promoters. Some people bid high. Some people bid low. But at the end of it all, the average price sought by the shareholders will be the price at which Vedanta will have to delist. Ergo, they will have to pay this price to take the company private or it’s a no go.
However what if investors collude? What if they could act in unison and demand a ridiculously high price? The average price aka the delisting price will inevitably be higher. Everybody makes money.
But it’s hard to collude when there are thousands of independent agents acting in their own self-interest. It’s almost impossible to get them to act together. Unless that is — groups of investors start “cornering” most shares by buying out other individuals (before the delisting). Then… you could have a very small group owning most of Vedanta. They can demand as high a premium as they like from the promoters. The promoters can make a counteroffer, but investors don’t have to concede. If they don’t get their price, they could walk away and the company will stay public.
But… it’s still a long shot.
A more prudent alternative is to simply refuse to sell. Don’t do anything. And if the promoters can’t get to the 90% shareholding benchmark, the status quo will persist and Vedanta will continue to be a listed (public) company.
The last use case is the most unfortunate use case. What if you are one of the rebels and Vedanta still manages to breach the 90% ownership mark? Well, you'll have one year to sell your shares to Vedanta at the final delisting price. They are bound to accept it.
But after that, you’ll be stuck being a minority shareholder in a private company. You won’t have the same luxuries anymore. The promoters will decide for you. You can’t take your grievance to SEBI. Hell, they might never even consult you for anything. It’ll be sad.
Hopefully, it doesn’t come to that, eh?
The Greatest Scandal of 2020
June 18th — A multibillion-dollar German payment behemoth is expected to declare its financial results. But the results don’t show up. Instead, the company tells investors that the auditor can’t locate €2 Bn in cash. The next day the stock price tanks 75%.
The CEO resigns. 2 days later, the company confesses that the money probably never existed. The CEO is arrested.
And 7 days after the original confession, the company declares bankruptcy.
From ~€15 Billion to €0 in 1 week. This is the story of Wirecard.
American Dream no more?
Also, President Trump issued a proclamation this week to suspend the H-1B visa program temporarily. Obviously this doesn’t bode well for Indian tech companies or the people that were aspiring to work in the US. But it is what it is and we will just have to put up with it I guess. You can read more about it here.
The Government’s Money Pipeline
We also published this cool infographic on central government receipts and how they fund their expenditure.
Until next time ...