More twists and turns in takeover battle

S. Vaidya Nathan

THE BATTLE over Gesco Corporation has intensified with the Mahindra-Sheth combine picking up the stake of 6.34 per cent held by the International Finance Corporation (IFC) at Rs 44.

This strengthens the combine and also leads to a revision of their open offer price to Rs 44 for a 33.5 per cent stake in the company. Shareholders of Gesco Corp would do better to wait till the last date to ensure that they make most of the ongoing battle for control.

The promoters of Gesco and the white knight, the Mahindra group, appear to have secured an edge over the Renaissance group after the IFC deal as their stake is enhanced to 18 per cent. The Renaissance group has 10.5 per cent and would have to substantially revise its latest open offer price of Rs 27 per share. The top management of the group has indicated a willingness to go beyond the Rs 50 mark.

If it backs its word with an offer on the table, a further round of price increase for the open offer seems certain. Clearly, the promoters of Gesco appear to have used their connections well to sew up the deal with IFC. A similar factor appears to be at work with regard to the financing secured from HDFC.

HDFC: A strange role

The HDFC has come forward to finance the open offer made by the Mahindra-Sheth combine and given a line of credit for Rs 30 crore. But what stands out is the alacrity with which HDFC teamed up to bankroll the open offer. Is it a case of the old boys network at play or is it just a commercial move?

This question assumes importance in the light of the fact that HDFC has at no point indicated that it would pursue takeover financing as a line of business. The Chairman of HDFC, Mr Deepak Parekh, has indicated that ``HDFC has no policy to fund takeovers. We only get involved where it pertains to our core activity. We are not looking at industrial takeovers''.

It is common for takeover offers in most markets to be accompanied by financiers. But in this case, the alacrity shown by HDFC seems to suggest that it may have some interest in ensuring that Mahindra-Sheth combine gets the control. If it is on account of a sizeable exposure to Gesco Corp, then from the point of view of disclosures, it may better for HDFC to come forward and provide details.

Its shareholders are entitled to know why it straying into non-core areas. If so, in its capacity as a lender, is it uncomfortable with the Renaissance group? The role of HDFC has assumed importance since the Renaissance group has said that ``HDFC is a person acting in concert'' and that it would raise the offer price beyond Rs 52, if HDFC were to extend a line of credit.

Quite clearly, HDFC cannot be considered a person acting in concert. But some of the issues raised by the Renaissance group are important. For instance, would HDFC extend a line of credit to the group. This remains to be seen and is subject to much doubt if the subtle indications provided by the Mr Parekh are anything to go by.

The sum and substance of what Mr Parekh has said in this context is this: We are not taking sides. When we lend, we look at the credit-worthiness of the entity we are lending to, the duration of the loan and the rate of interest. We are not interested in the equity. This appears to hold some merit but at the end of the day, one cannot help wonder if factors beyond business are at play in the bankrolling of the Mahindra-Sheth combine. HDFC shareholders are entitled to know.

Striking the right line

In what comes as a view with a difference, the HDFC Chairman, Mr Deepak Parekh has said in the past week that ``hostile takeovers are necessary as they help unleash the value of a company. These are a global phenomenon. To survive a company will have to figure in the top three. If a company does not perform, it will be out''.

At a time when the corporate sector, its chieftains, its apex chambers, some stock exchange presidents and even the SEBI committee on takeovers (through its proposals which could act as a restraint on activity in the market for corporate control) appear to making noises against hostile takeovers, Mr Parekh has done well by striking the more balanced note on this issue. However, if institutions stand in the way of hostile takeovers, entrepreneurial activity is also not likely to get a fillip. The lack of support for new entrepreneurs is a point that has been highlighted by Mr Parekh in the context of the technology sector but would hold good in these cases as well.

Hostile takeovers are the need of the hour for shareholders and lenders in Corporate India (though the big lenders have expressed a view against such takeovers), since they could shake managements and put a greater part of the corporate sector on a performing mode. And that too in a manner that ensures better value for shareholders.

With institutions having such a track record, a Bajoria or two or many more may actually be good for India Inc. and shake up management and promoters groups to look at improving shareholder value in a sustainable and credible way. If the domestic institutional investors such as LIC, GIC, UTI, IDBI and ICICI accept hostile takeovers, they may yet find more value for their equity holdings and also enhance their chances of recovering some non-performing assets.