GESCO: Owners seek firm anchor

S. Vaidya Nathan

OWNERS of family-owned businesses are waking up to warning bells with regard to their ownership claims and rushing to shore up their defences.

After Bombay Dyeing and Ballarpur Industries (targeted to a lesser extent), it is now the turn of the promoters of Great Eastern Shipping to face the music.

Amidst all this activity, chambers of commerce have asked for protection against hostile takeovers -- raids of the Bajoria kind on Bombay Dyeing -- by allowing promoters to raise their stakes without any threshold for open offer trigger.

As for the latter aspect, the SEBI takeover regulatory framework allows promoters to raise their stakes by five per cent via the creeping acquisition route, without making an open offer. Now the chambers of commerce demand either this to be raised to 15 per cent (similar threshold to that of would-be acquirers) or that promoters be allowed a freehand.

The Great Eastern Shipping promoters have decided to go the market way to shore up their defences against a plausible takeover. Since the promoters -- the Sheths -- hold only around 14 per cent (maybe a little more), quite obviously the company may be vulnerable to a takeover.

The first danger signal

Warnings have already come from the goings-on vis-a-vis a sister concern, GESCO Corporation. The Delhi-based Renaissance group, headed by Mr A. H. Dalmiya, has made an open offer to acquire 45 per cent of the equity capital at Rs 23 per share. Though the share price moved up quickly to this level, at the time of announcement, there was a sizeable gap between the two prices.

GESCO was created out of a demerger of the land and shipping businesses of GE Shipping. It is to be focal point for the property development business of the group. Though all the real-estate acquired by GE Shipping is yet to be vested with this company, its asset base is the attraction. Also, the small equity makes it that much more lucrative for a would-be acquirer. In this company too, the promoter group holds a 13 per cent stake only.

Buyback for promoters' sake

The promoters have launched a two-pronged strategy to tackle the situation. Taking cue from the vulnerability that the open offer for GESCO has exposed, the promoters moved swiftly to shore up their stake in the long-held family flagship, GE Shipping.

The board of directors is to approve a buyback programme at a meeting on October 31. Obviously, the promoters would not tender to the offer and whatever equity is bought back, would shore up their stake indirectly (as they would hold the same number of shares, but on a smaller base).

What stands out is that if, indeed, GE Shipping has surplus cash that could be returned to shareholders without affecting the growth prospects of the company, it has not deemed it fit to do so till now. But now that there is a cloud over the promoters' control, a buyback programme is set to be rolled out.

Given the state of the industry over the years, GE Shipping's aging fleet that requires replacement and lack of adequate internally generated cash flows, it is doubtful if the company would, indeed, have surplus cash. In this situation, a buyback may prove detrimental to non-promoter shareholders who stay invested in the company.

This also has to be seen from another perspective. If the buyback is indeed a way to shore up promoters' equity, it may be priced at a substantial premium to the current market price. This could prove good for those who take up the buyback but affect shareholders staying on.

Essentially, a buyback may not lead to any lasting value improvement for shareholders who stay with the company given the circumstances in which it is likely to be done. Yet another aspect that has to be noted is that the company's funds would be used for shoring up the promoters' equity. While this does not seem the best way out, at least the promoter group is coming up with a market-based response.

In good company, but...

In using the company's funds to shore up promoters' equity, GE Shipping may well be in good company. MICO has proposed a second round of buyback at Rs 4,000 per share (lower than the first buyback programme price of Rs 4,200) whose sole purpose may well be to indirectly raise the equity holding of the Robert Bosch group.

And in tagging Hindustan Lever along in the open offers for Rossel Industries and now International Bestfoods, Unilever Plc may also be just doing the same. More so, since a merger of Rossel Industries and International Bestfoods with Hindustan Lever could lead to a hike in Unilever's stake.

But in these two cases, the companies can claim to have surplus cash and in HLL's case, teaming up in buying stakes may go well with the growth plans from a long-term perspective. But what stands out is that the companies have not provided details of what they do and why they do it.

Some of the recent declines in valuation may be due to the lack of quality information that one would expect of a company such as Hindustan Lever. In GE Shipping's case, the absence of surplus cash flows makes the position worse in the buyback situation. The beaten down stock may have some upside linked to the buyback price but from a medium- to long-term perspective, the use of company funds to shore up promoters' equity may not be viewed favourably by the market.

Defending the terrain

The Sheth group is also to launch a counter-offer for the GESCO Corporation and it is now quite likely that the open offer may be higher than the Rs 23 offered by the Renaissance group. The effect of these developments may deliver better value to the shareholders in the short term. In the long term, it may well have the consequence of taking an asset-rich company largely private -- be it with the Sheths or Renaissance group. And that too would be in tune with the trends in the corporate sector with Piramal Holdings and Chemplast Sanmar (to name but two) being the more prominent examples.