Tuesday, June 12, 2012

Is there an Opportunity in Welspun Global ?

There is a merger proposal between Welspun India and Welspun Global; The Board has decided that Welspun Global Brands will be merged in Welspun India.  The merger ratio decided by the board is 1:1.

Looking at results of Welspun India and Welspun Global, We can safely say that Welspun Global results are dismal and they are loss making 

Ratios (2011- 2012)
Welspun India
Welspun Global
Sales (Cr )
Net Profit (Cr)
EPS (Rs)

These results are strictly not comparable because the purchases made by Welspun Global are from Welspun India, essentially Welspun Global is a marketing arm of Welspun India.  There can be issues of transfer pricing.

Merger of both companies can effectively eliminate the issues of transfer pricing.

Also Promoters of M/s Welspun India are buying shares of Welspun India from open market. They have already informed to Exchanges their intention to buy 50,00,000 shares of Welspun India up to price of Rs 54/- from open market.

Along with that they have made open offer to buy 26% public shareholding of Welspun India.

Investment Rationale : It would be a good bet to buy Welspun Global Brands at CMP of 36.50/- as derived price based on stock price of Welspun India should not be less than Rs 50/-. This rationale is based on merger ratio between the companies at 1:1.

What can be pitfalls in this trade?
    a) The price of Welspun India can fall in market: True, the price of Welspun India can fall in market, but that may not happen because the promoters are buying from open market and also there is an open offer to buy shares at Rs 54/- by the promoters.

    b)The merger proposal between Welspun India and Welspun Global may not go through: There is a probability that the merger or merger ratio accepted by the Board of Directors can be rejected by shareholder. Welspun Global share holder would not oppose the merger as it is beneficial to them, Shareholders of Welspun India may oppose the deal but promoters are already holding 46.50 % stake, They will buy additional 5.50% stake from the market and 26% from open offer taking their stake to more that 75 % depending on the shares tendered in open offer. Hence we can safely assume that merger proposal will through.

    c)Can court reject the merger: Yes the court can reject the merger if it is not in general interest of the public, but if the mergers are approved by shareholders of both companies in court convened general meeting, Most of the time they accept the merger.

    d)How much time would the merger take?  : These process of mergers will take almost 6 months    to 7 months.

Overall it seems that merger will go through and prices of both companies will align.
This is not a recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

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