Monday, July 2, 2012

Special Situation in Ivrcl Assets and Holdings

IVRCL Assets and Holdings is a subsidiary of IVRCL Limited, holding 75% in the company. The company is on the verge of being merged with IVRCL Limited.

The process of merger has reached a final stage, All approval from shareholders and creditors have come, the resolution is passed in Court convened EOGM, the only approval pending in merger is the approval from Hyderabad high court. 

The hearing in Hyderabad high court is postponed several times in last 3 months, In fact today also the hearing is there for filing of final copies. I expect the approval from high court in some days or may be today also. The delay in filing in courts are norm in this country. I don't expect any problem in getting the approval.

Is there an opportunity in merger ?

a) The traded price of IVRCL AH is Rs 42/-.
b) The price of IVRCL is Rs 53.60 /- in derivatives July futures contract.
c) The merger ratio of the company is 5 shares of IVRCL ltd for every 6 shares of IVRCL AH.

So effectively if I buy six shares @ Rs 42/- , I will get 5 shares of IVRCL for which the cost would be Rs 50.40. Hence I can buy 4800 shares of IVRCL Ah @ 42/- and sell 1 lot (4000 shares) IVRCL July futures @ 53.60.

Effectively, Cost of IVRCL will be 50.40, and I will be able to sell a 53.60. The difference is more than 6% waiting to be earned.

I expect that final approval will come before the end of this month and so the return seems compelling. moreover if it is delayed by some more days, you can rollover your short position, where you will be able to cover the cost of carry.

Are there any pitfall or precautions in the deal ?

a) There is a remote possibility of the merger not accepted by the court (very remote possibility, but it exist technically)
b) IVRCL AH is illiquid stock and it is in trade to trade segment.
c) The spread may become larger if there is delay in getting the approval.

But overall, It is a good bet where probability of higher returns are very high.
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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