Vedanta’s delisting plan: What choice do shareholders have?

Metals and mining conglomerate Vedanta, on May 12, announced its holding company’s plans to delist the Indian business. The holding company — Vedanta Resources — has proposed to acquire all fully paid-up equity shares of the company that are held by public shareholders at an indicative offer price of ₹87.5 per share. On May 18, the holding company announced a floor price of ₹87.25 and the board of the Indian company approved the delisting proposal.

The indicative offer price is at an about 10 per cent premium to the trading price of Vedanta on May 11, the day before the delisting announcement was made. But, at ₹87.5, the company is valued about 50 per cent lower than its book value as on September 30, 2019. It is also almost 40 per cent lower than the market valuation of the company just before the impact of Covid-19 was seen.

Now, is the shareholder left with no choice except to tender the share at the indicative offer price? Not necessarily. As the name suggests, the offer price is just indicative. The final price at which delisting happens will be determined by the reverse book building process.

Arriving at the delisting price

Under the reverse book building process, the final offer price shall be determined based on the number of shares bid for delisting and the prices at which the shares are offered.

The merchant banker (SBI Capital Markets, in Vedanta’s case) and the company will make a public announcement and also dispatch a letter of offer to the public shareholders along with a bidding form.

Shareholders desirous of availing themselves of the exit opportunities are required to bid their shares at the floor price or at any price above that. They may approach trading members appointed by the company at the bidding centres to place bids on the electronic system.

The final offer price is the price at which the aggregate number of shares bid till that price, if delisted, will take the promoters’ shareholding in the company to at least 90 per cent. For example, say, the indicative offer price announced by a company for delisting is ₹100. Suppose ‘x’ number of shares were bid at ₹120, ‘y’ at ₹125 and ‘z’ at ₹130. If delisting ‘x+y’ number of shares takes the shareholding of the promoters to at least 90 per cent in the company, then ₹125 will be considered the final price for delisting.

But again, the promoters shall have the choice to accept/not accept the price. If the price is not accepted, they may make a counteroffer. If the price is accepted, the promoters shall be required to accept all valid offers up to and including the final price. The remaining shareholders whose bids are not accepted will have the right to tender the shares at the accepted final price till one year from the date of delisting.

It is also possible that the eligible number of shares for delisting at the accepted offer price does not result in the promoters’ shareholding crossing the specified limit (90 per cent). In that case, the offer shall be deemed to have failed and the company shall remain listed.

What now?

Once Vedanta announces the opening of the bidding, investors can offer their shares at the price that they think would reflect the value of the company.

The market price of Vedanta, amid the announcement of the delisting, was trading at cyclical lows on account of Covid-19 and weak commodity prices. The three-year average daily price of the stock (till mid February 2020, since when the pandemic impact hit Indian stock markets) was about ₹225. If the impact of the US-China trade war on the stock is taken into account, the average market price of the stock in February 2018 (when the tariffs were first introduced) till mid-February 2020, was ₹195.

Also, the intrinsic value of the company seems to be higher. Consider the book value, for instance. It is ₹177 per share per the latest balance-sheet, as of September 2019. For the quarter ended December 2019, the company reported a net profit of about ₹2,665 crore. This would have further increased the book value of the company.

It is unlikely that the book value per share would have fallen drastically from the above levels. Having said that, if the company has been incurring losses from operations since the beginning of 2020, that could exert some pressure on the book value. But chances are remote that the book value will fall by 50 per cent.

Investors can consider bidding the shares at a price higher than the indicative offer price of ₹87.5, which does not look attractive. If your bid is not eligible — that is, if your bidding price is higher than the final offer price accepted — then you may later tender the shares at the final offer price itself within a year of delisting.

As on March 31, 2020, public shareholders held 48.94 per cent of the paid-up equity share capital of the company. Of this, more than 40 per cent are held by non-individual shareholders including mutual funds, foreign portfolio investors and financial institutions, who will likely offer their shares at higher levels. Per media reports, securities companies, too, are advising investors to offer their shares in the range of ₹160- ₹180.