Hovs Limited : Second Update and some discoveries pertaing to Hovs Ltd.

Further to my Blogs on Hovs Limited (Here), (Here) .

When we mine in the unknown / Unlisted companies, we try to deduce and infer based on facts and material available in public domain. Also at times it may happen the some more facts are there in public domains but are not discovered by the person finding the details. Sometimes it may happen that related news are glanced and discarded as non - essential for inference. Also some facts about unlisted companies are known only after some statutory filings are done by companies. Before such filings are done, it is very difficult to discover the facts.

I accept that I did not come across some facts about SourceHov and some news which were there in public domain were discarded as unrelated. But I would share what has transpired to me now.

Some more facts about SourceHov.

a) Citi Venture Capital International (CVCI) does not hold shares of SourceHov but now it seems the shares are held by The Rohathyn Group (Here), (Here), (Here).

(This inference is based on above mention link.)

b) Shares held by Rohathyn Group has been sold by them to HGM (The fund promoted by promoters of Hovs Limited) today i.e 4th Nov, 2014.(Here), (Here), But no Release on Sites of Bantec or SourceHov yet.

This fact that CVCI is not the share holder and there is a new shareholder named Rohathyn Group leads us to change our hypothesis on some deal structure of Hovs LLC with SourceHov.

a) The transparency in valuation for SourceHov can be compromised.

b) The deal between Rohatyn and HGM is closed but valuation of the deal is not known.

c) The postal ballot of Hovs Limited also takes permission to sell stake to parties other than the promoter group, but now the deal is already closed by promoter so no question of better price by some competitor.

d) Now the only question in postal ballot remains, can Hovs LLc sell its stake in SourceHov to promoters ?

e) The last question still remains , if the shares held by Hovs LLc are sold, what is to be gotten by shareholders of Hovs Limited ? A very Hefty Dividend ?

I had also raised the issue of corporate governance with SEBI regarding voting of non - promoter shareholders  who are also associated with HGM ? The CFO of HOVS Limited replied that

" In any case, we further state that , any shareholder who is not entitled to vote on resolutions proposed in the postal ballot notice dated September 30, 2014 under applicable law, will abstain from voting or such shareholder's vote will not be taken into account"

From the above we can at least infer that such votes may not be counted in final postal ballot now.

I also expect some announcement by Hovs Ltd to Stock Exchanges for us to get further clarity on slae of Shares of SourceHov and also postal ballot.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this company.

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased

Update of HOVS Limited

Further to my Blog on HOVS Limited (here)

I have in past commented on developments of HOVS Limited. Now again further developments are happening in the company with regards to sale of their overseas investment SourceHOV LLC.

To refresh, Hovs Limited has a 100 % overseas subsidiary, which in turn has an equity stake of 27.20 % in SourceHOV LLC. The major shareholder in SourceHOV is Citi Venture Capital International (CVCI) to the tune of 65%. Hovs and CITI both were trying to sell its investment with an asking price of $1.20 billion. 

The asking price of SourceHov, converts to a big value for shareholders of Hovs Limited We will try to understand now what the shareholders of Hovs Ltd will garner. (do visit my previous article to know the background in details)

On 29th September, Hovs Limited said that (Here), (Here). The gist of the filings were :

a) On 3rd April, 2014. HGM, The fund promoted by the promoters had bought a company in US, named BancTec Inc (Here),(Here) The price of these acquisition was not known.

b) The on 29th Sep, These fund and the SourceHov reached a merger agreement where Banctec Inc will be merged with SourceHov LLC.

We don't have any valuation for either companies, to do analysis of pricing.

c) Also Hovs Ltd said, It will hold a Board meeting on 30th September to consider transaction relating to its wholly owned subsidiary.

On 1st Oct, 2014, The company made a release to Stock Exchange regarding the outcome of board meeting (Here), The major takeaways of the filings are :

a)  The Promoters themselves intend to buy the company SourceHov LLC, with the help of its fund Handson Fund 4 LLC (HOF4).

b) The company holds 26.1% in SourceHov LLC.

c) They mentioned that, They have offered to buy other major shareholder also, The major is CVCI.

d) The minimum sale price would be $ 95 million, converting the share value of the company at $ 363 million.

e) The money received by the company from the sale of asset will be used towards paying dividends and also making further investments in current Indian business.

f) Banctec will be merged with SourceHov LLC.

g) The valuation of merger was done by M/s PKF Shridhar and Santhanam Chartered Accountants, whereas Keynote corporate Services limited arrived at the valuation report of merger between SourceHov LLC and Banctec Inc.

h) The promoters would abstain from voting on resolution for sale of investment. As It will be a related partytransaction.

The Current market cap of company is (@cmp 152/-) Rs 190 Crores, whereas the amount expected from sale of SourceHov LLC would be minimum Rs 570 Crores. From the above offer of the promoters, The value per shares that can be fetched to Shareholders of Hovs Ltd will be almost Rs 455/-, If I reduce the Taxes to be paid, It will still come to Rs 364/- (@20% Tax). HUGE, It also has its BPO and KPO business in India.

But I have to make some critical comments on these development to help us take conscious investment decisions.

a) Previously the stake of Hovs Limited in Source HOV was 27.20 % , which now the company says is 26.1%.  The only rationale which I can think of for reduction in stake could be issue of ESOP to employees of SourceHOV LLC. But only the promoters can confirm these.

b) The company has said that the offer to buy is there from HOF4, They will also try to get offers from others and the offer is made to buy from others major shareholders also, the other major shareholder is CVCI. Here we can take solace that the valuation sought by CVCI will be a good price as they are not the related parties and the final deal price can be more than $95 mil for Hovs Ltd as buyers will have to match price to all sellers.

c) The asking price of SourceHov in the past was at enterprise value of $1.20 billion and they had around $650 million of Debt, So the equity value of the company may come to around $550 million. whereas the the promoters are now putting the price of $363 million. I guess final price would be more than $363 million as negotiations may be going on with other shareholders and the promoters may not be willing to disclose the final price which they are ready to pay. Also such low valuation price of SourceHov may put psychological pressure on sellers regarding the right value.

d) The valuation done on merger of Bantec with SourceHov was by M/s PKF Shridhar and Santhanam Chartered Accountants, who are based in India, whereas both the companies are based in Nevada, USA. The background of the firm is (Here). Same goes with Keynote Corporate Service who has worked on merger ratio. I guess they may have competencies, but they are based and operate only in India, I guess the reports are just a formal document for compliance. I guess the promoter should have taken these reports from professional who have vast exposure in such international deals. I am also surprised the CVCI accepted such report. Since they are the major shareholder in SourceHov.

Also no data is there in public domain regarding the price at which Banctec was bought, Balance Sheet of SourceHOV, Balance Sheet of Banctec. I am not able to understand about the data shared by Promoters of HOV to these professional and Also What additional data they may have sought ?

e) The promoters have agreed to not participate in  voting process for sale of SourceHov by the shareholders of Hovs Limited. But there are also some minority shareholders in Hovs Limited who are also connected to Promoter, Hondson3 and HGM and maybe Hof4. Some also happen to be related to promoters and their funds in the past. (Here), (Here), (Here). Not sure if all of them will participate in voting process and how many are allowed ?

g) The Promoters are trying to buy established business from listed entity, The listed entity Hovs Limited does not have huge dedt in its books , It has total liability of Rs 16 crores on consolidated basis as on 31 st March, 2014. (Here) , Hence we can infer that Company was not in need to sell the asset but the promoters wanted to buy it. Hence promoter should now come with clear information on How the proceeds will be used and in what proportion. The promoters have no right to keep the money for further use as they themselves are buying the assets and they have their own established funds for new business opportunity.

The promoter will have to give big divided, at least 70 % to 80 % of the proceeds, and they should declare such intention before the voting. Investor then may definitely support their resolution. Also not in near past have they said about requirement of funds in current business nor have they availed any credit limits.

h) Will SEBI look in this case as no data of transaction is available in public domain, It is also related party transaction, Also some major shareholders can be termed as related party. There is no clarity on deployment of funds.

From the above discussion, We can infer that 

a) The company can get more that Rs 360/- per share as base case and there are high probabilities of much higher price.

b) There will be a expectation and demand for a  big special dividend to the tune of not less than Rs 250/- to Rs 300 /- and I am sure company can..

c) We need to have more clarity of Investments in current business

d) The Promoters should come out with further details on this transaction as part of better corporate governance.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this company.

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased.

A Blind Bet : Hovs Services Ltd

Hovs Services Ltd (HOVS) is engaged in providing BPO and KPO Services (Here).

It is a profit making company, with an EPS of Rs 1.14/- for 2012 on standalone basis, and EPS of Rs 3.91/- on consolidated basis, The CMP of stock is 96.30. (Here)

If we look at the business model of BPO and KPO of HOVS, we may find that the price of stock is little stretched, but unlike small IT companies, They don't have debt, but they have an investment in SourceHov LLC (Here).

SourceHOV, with approximately $525 million in revenue, is a mid-size BPO and KPO firm serving customers in more than half of the Fortune 100 companies with domain expertise in document centric applications in health care payers and providers, finance and banking, public sector, publishing, legal, insurance, manufacturing and commercial industries, including specialised consulting services for construction management, tax benefits, legal claims settlements and economic consultancy.

The company counts over 12,600 employees operating from over 80 delivery centres in six countries including the US, Mexico, Canada, India, China and the Philippines (Here).  Citi Venture Capital International (CVCI) owns 65% stake in the company,HOV Services has 27.2% interest in the company.

Also Read (Here),(Here),(Here) to understand SourceHOVS LLC past M&A transaction.

Recently it was quoted in newspaper that CVCI was looking to exit HOVS LLC, and the rumoured asking price was around $ 1.20 billion (Here), Then there was a new grapevine that CVCI has appointed Morgan Stanley for sale of SourceHovs LLC, and they have got the bids at $1 Billion. (Here) (Here).

Till here there was no communication from HOVS about its 27.2 % stake in SourceHovs LLC. HOVS holds the stake in the company via its 100 % US subsidiary (Here), HOVS had on 28th Oct, 2013 had intimated that it has a step down subsidiary, which holds 27.20 % stake in SourceHovs LLC (Here), and the rumour for sale in media may be true only for CVCI. 

But on 1st Jan,2014, HOVS informed stock exchanges about the appointment of Morgan Stanley & Co LLC by SourceHOV LLC to explore various strategic options. The Company through its US based wholly owned subsidiary (WOS) owns stake in SourceHOV LLC. also it further said that such appointment of Morgan Stanley & Co LLC has been approved by SourceHOV on December 29, 2013 and the Company is now intimating the Stock Exchange (Here).

By now it is clear that HOVS holds 27.20 % stake in SourceHovs LLC and some strategic options like sale, Placements may take place. Also believing  rumour in print media that CVCI wants to exit cannot be ruled out it is a PE player and they are always open to buying and selling at right price. Also the tentative figures can range from  $800 million to $1.20 billion, with some news report of bid at $ 1.00 billion.

Now if we consider that HOVS is entitled to 27.20 % of the booty, it that would be the vale of its stake, The amount comes to around $ 272 Million (Considering the price of a billion). That comes to value of Rs 1632 Crores($1 = Rs 60). The market cap of HOVS as of now is Rs 120 Crores.

Assuming that company is able to sell its stake in SourceHovs at a billion dollar, or SourcesHovs is able to get a valuation of Billion dollar, The vale of HOVS stake would be huge, It converts up to Rs 1300 per Share. Also if it is able to sell the stake it may realise at least 1300 Crores after taxes, which will be converted at Rs 1045/- per share. 

There is no stake sale which has happened yet, but there are confirmation from the company about its strategic options and there lies probabilities of the event happening, also if the stake sale does not happen in near futures, we at least got to understand the value of its investments

With CMP of 96.30, and with expectation of big valuation of almost more than Rs 1000 /- per share in SoureHovs LLC. Along with its standalone business in India, I believe the share is available at a deep discount to its derived value (There should be some discounting of holding company but not at 90 %)

If the sale happen, we can expect a hefty dividend, (Promoters hold almost 50 %,) along with some 11 % held by Technocrats, who may ask for dividends along with public.

The Risk reward ratio in buying the stock is favourable and market may take a very long time to discover it fair value.

I would also qualify that I have worked on the valuation parameters of the deal only, and I have not yet seen the pattern of corporate Governance in Company. I have not seen in detail about the background of promoters except that They hold office in SourceHovs LLC. Also all major Investors and Promoters are related here (Here).

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this company.

I welcome your critical comments and suggestions.

PS : I have some position in the stock, So I can be Biased.