Buyback rush may open arbitrage gate for investors

Ajay Mishra (Company Secretary) (74327 Points)

08 October 2010  

Buyback rush may open arbitrage gate for investors

MUMBAI: Investors can look forward to gain from arbitrage opportunities in some of the open offers that are expected to hit the market in the coming months. There are around half a dozen such companies whose shares are currently quoting at a substantial discount to the offer price.

Investors can buy the shares in the secondary market and subsequently tender them in the open offer at a higher price, thereby pocketing the difference. The quantum of gains, however, will depend on what price the shares are bought, and also on the acceptance ratio — the number of shares accepted by the acquirer as a percentage to those tendered in the offer. These two factors make or break the opportunity for arbitrage gains.

Cairn India , Kale Consultants, Pioneer Distilleries, Amtek India and Surana Inds are among notable companies where the acquirers have announced open offers at a premium to the market price. Their shares are quoting 2-17% below the respective open offer prices. Higher the premium over the market price, better the scope for arbitrage.

Assuming investors buy shares of these companies at the current level, they can earn gross returns between 2-17% by tendering shares in the open offers. However, the net gain could be much lower, as it is subject to tax and other costs. Again, returns are not assured as it depends on how successfully the offer is completed. It may or may not be completed due to price factor or poor response from investors, feel brokers.

“Investors stand to gain, if the offer is at a huge premium to the market price and is completed successfully,” said ST Gerela, CEO of a Mumbai-based broking firm Satco Securities and Financial Services.

One has to also take into consideration tax liability and various costs, including interest and opportunity cost that will have a major impact on returns earned from arbitrage transactions, he added.

Traders are always looking for good event-based arbitrage opportunities from which they can earn decent returns in a short time, said BR Bagri, chairman and chief executive, BLB , a leading arbitrage firm. He, however,

feels the returns are never certain as a company may not be able to complete the offer successfully due to factors beyond the control of the management.

Pioneer Distilleries closed at `84 on Thursday, at around 17% discount to the offer price of `101 per share. The offer is being made by United Spirits and will open on November 10. Shares of mid-sized IT company Kale Consultants are trading at a 12% discount to the open offer price. Barcelona-based Accelya Holding World has made the offer to buy 20% equity from the Indian company’s shareholders at Rs 172 per share. The offer will open on November 5, 2010.