MSK PROJECTS - AN ARBITRAGE OPPORTUNITY

MSK Projects provides a very attractive arbitrage between the current market price of Rs 45 and the open offer price of Rs 84. This company is a construction company which started with residential and commercial projects but later diversified to the road sector and BOT (build-operate-transfer) projects.



The company achieved revenues of about Rs 244 crore for FY08 and made a PAT (profit after tax) of about Rs 17 crore. In the first half of the current financial year, both revenues and profits are up by 50%. The EPS on a TTM (trailing 12-month) basis is about Rs 9 and at the current market price of Rs 45, the stock is available at a price to earning ratio of 5.



Now, this company made a preferential allotment to a company called Shubhkam Holdings in October 2007. Shukhkam prior to this preferential allotment was already holding about 8.7% stake in the company. After the preferential allotment, their holding went up to about 24%. Since their holding went beyond 15% the open offer got triggered. Shubhkam Holdings announced the open offer at Rs 84 in October 2007.



This open offer has been delayed by more than one year because of the difference in the stand taken by the Securities and Exchange Board of India and the acquirer, under which the regulation of Sebi this open offer has to be made. The acquirer wants to make this open offer under regulation 10 of Sebi. This means that the acquirer is only a strategic investor whereas Sebi’s stand is that this open offer should be made under regulation 10 along with regulation 12, which means that acquirer would be a part of the promoter group.



Now, this appeal was filed by the acquirer with Securities Appellate Tribunal and SAT wide its order date October 23, 2008 has referred the matter back to Sebi for reconsideration and has asked the market regulator to give its decision on the matter.



If you look at the shareholding pattern of MSK, promoters and Shubhkam together hold about 46% in this company, which means 54% shares are the ones which are eligible to be tendered in the 20% open offer. Theoretically, the acceptance ratio will be 40%, given this ratio. But if you do an analysis of the open offer, which have opened and closed in the last one year, you will find that the actual acceptance ratio in most cases is much higher than the theoretical acceptance ratio.



Here also we have taken two scenarios. One is a conservative scenario where we have assumed a 50% acceptance ratio and a favourable scenario where the acceptance ratio is assumed at 70%. The purchase price in both cases is Rs 45. The open offer price in the conservative scenario is about Rs 84 while in an aggressive scenario we have taken it as Rs 90, because of the possibility of interest component being added to the open offer price. Time period for investment in both cases has been taken as six months and the value residual shares is taken as Rs 25.



Now, under a conservative scenario, you get an annualized return of about 42%. Taking an aggressive scenario or favourable scenario, the returns are more than 100%. In fact it comes to about 110%. So in a scenario where there is a lot of uncertainty and people are not willing to commit a lot of money into the stock market, I think this stock offers a very attractive arbitrage, since the open offer has got delayed by such a long time, people have probably forgotten about this arbitrage opportunity. In the uncertain times, it provides virtually a risk-free investment where returns can be between 40% and 100%. The major risk to this investment is prolonged delay in the opening of the open offer. The other risk is that the risk of open offer getting delayed, but we are ruling out that possibility because we don’t have any precedence where the open offer has been announced and then withdrawn at a later stage. So, that possibility is totally ruled out.



So, the only bigger risk which I can see with this investment is some inordinate delay in the opening of open offer which can pay gains for investors, but it is a good investment for somebody who is willing to take a calculated risk. In the uncertain times, I think 40% return on the investment should be good enough for many investors.





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