ITW Signode: Accept

Recommendation: Accept

B. Krishnakumar

THE US-based Illinois Tool Works has come out with an open offer to acquire the 49 per cent non-promoter stake in its subsidiary ITW Signode India.

The offer, at Rs 80 per share, is subject to a minimum acceptance of 29 per cent (66.35 lakh shares) of the outstanding capital.

Since the acquisition of controlling stake, the American parent has managed an operational turnaround in ITW Signode. The company's performance has improved steadily in recent years and it has also become debt-free. The restructuring efforts coupled with a reorientation of the product mix impacted positively on ITW Signode's performance.

The beneficial impact of the restructuring efforts is reflected in a steady growth in performance in the recent quarters despite the fact that the overall business environment has been unfavourable. For the first half of this fiscal, the company posted a 4 per cent increase in turnover and 28 per cent jump in post-tax earnings to Rs 5.12 crore.

Fundamentally, ITW Signode appears strong with the long-term business prospects being positive. It manufactures steel-strappings which account for a major portion of the earnings. The company supplies strapping machines and spares to steel producers.

Apart from steel strapping business, the company also a prominent presence in industrial packaging division. ITW Signode offers packaging solution to various industries such as steel, pharmaceuticals, consumer durables and other sectors which have secondary packaging requirement.

ITW Signode derives a significant chunk of its revenues from the packaging business comprising packaging equipment and consumables. It constitutes around 40-50 per cent of ITW Signode's business. As a diversification move, the company has moved into specialty chemicals market.

Taking into account the recent trend in performance and future business prospects, there is hardly any pressing compulsion for existing shareholders to accept the open offer. Moreover, there is hardly any difference between the open offer price and the current market price.

On the flip side, the relatively lower liquidity has inhibited institutional investors from acquiring a sizeable exposure in ITW Signode. As a result, the share price of the company has tended to trade at prices that have not been reflective of its intrinsic worth and growth potential.

If the American parent manages to acquire 39 per cent stake or more from the open offer, it would be required to come out with a second offer at the same price. However, if the parent manages to acquire anywhere between per cent 29 and 38 per cent, it would not be required to come with another offer.

In this context, Illinois Tool Works also has the option to come out with a second offer after six months at any price higher or lower than the present offer price. Given this backdrop, the shareholders deciding to reject the open offer run a higher risk in terms of lack of liquidity and a possibility of a second offer at a lower price.

In this backdrop, existing holders willing to take that extra bit of risk could reject the current offer. Risk-averse investors could accept the offer. It, however, has to be reiterated that fundamentally, there is no compelling reason to accept this offer at the offer price of Rs 80.

Features

*Illinois Tool Works, USA, is coming out with an open offer to acquire a 49 per cent equity stake in its subsidiary ITW Signode. The open offer is at a price of Rs 80 per share.

*The offer is subject to a minimum level of acceptance of 29 per cent. If the number of shares tendered falls below 29 per cent, the entire offer would be rejected by the American company.

*The shares of the company are listed on the Bombay and National Stocks Exchanges.

*The offer closes on October 30.