Philips India: Reject

Recommendation: Reject

Suresh Krishnamurthy

SHAREHOLDERS of Philips India can reject the open offer for now in the expectation that Royal Philips will raise the offer price if it fails to get the required shares this timearound.

The key to a 100 per cent buyout lies with the financial institutions which hold a little in excess of 20 per cent in the company. If they throw in the towel, Royal Philips would have scaled a large hurdle in raising its stake beyond 90 per cent. Once it reaches 90 per cent, Philips India can be delisted and Royal Philips would have to make one more open offer to mop up the stakes of the remaining shareholders. If such an eventuality happens, shareholders can then accept the offer since they would have no other option.

The juggernaut of Koninklijke Philips Electronics N. V (Royal Philips Electronics) is continuing to roll and after Europe and other parts of Asia, the focus of its ruthless restructuring of operations has now turned to India. The open offer by Royal Philips for the entire minority interests stake in Philips India needs to be viewed in this backdrop.

There are several sides to this open offer issue. The offer brings into open the conflict of interests between Royal Philips and the minority shareholders in Philips India. There is a hidden suggestion in the open offer that the Netherlands-based parent company may find it difficult to take into account the interests of the minority shareholders in its future strategy for its Indian operations. Therefore, it has opted for a complete buyout of the minority interests stake.

However, the conflict of interests had become evident much earlier when a lighting manufacturing business of Philips India was transferred to Punjab Anand Lamp Industries (PALI). What underlined the conflict of interest was the majority stake obtained in PALI directly by Royal Philips and not through Philips India. The developments since then have only furthered this divide. It would have been better if Royal Philips had made an open offer much earlier when this conflict of interest emerged.

The fallout of the delay is reflected in the decimation of the market capitalisation of Philips India. And while the European parent of Philips India is now much admired for its value-adding and decisive restructuring moves, the shareholders of Philips India have reason to feel aggrieved. Philips' sluggish performance in the consumer electronics business has more than offset the company's superlative performance in the lighting business which has, on the whole, led to sharp declines in its stock price.

Click here for Chart

It is in this backdrop that the open offer comes. Philips says that the open offer price is at a considerable premium to the ruling market price. The long-term investors in Philips India would be horrified to hear that. For long, prices close to Rs 100 used to be the all-time low level for Philips India. Also, given the brand value of Philips in India, which has been generated and sustained by Philips India, the valuation of close to Rs 500 crore that the offer price of Rs 105 represents, can be said to be much below the fair value on this score alone. This should form the basis for shareholders to reject the offer.

The upside for the reject strategy rests on the assumption that Royal Philips would be forced to increase the offer price either because it realises that at the offer price of Rs 105, the share is unfairly undervalued or because it is forced by the other large shareholders in Philips India.

It can end up as virtually a no-profit-no-loss strategy if at the end of the offer Royal Philips raises its stake to more than 90 per cent. However, if these assumptions unravel, shareholders may be faced with the prospect of settling for a lower price. Those who feel that these assumptions are unrealistic would be better off accepting the offer.

However, shareholders who do not accept the offer need to be aware of the risks. One, there is no guarantee that Royal Philips will raise the offer price. Also, if Royal Philips fails to raise its stake to 90 per cent and then subsequently operates without attempting to mop up the remaining stake, there is the possibility that the market price may decline sharply.

Specified date :October 13

Offer opened :November 13

Offer closes :December 12

Offer price :Rs 105 per share