UNDERVALUATION OF ACCELYA SOLUTIONS OPEN OFFER
1.
BACKGROUND: Vide PA dated
November 14 2019 and DPS dated December 30 2019, an open offer for purchase of
25.34% of Equity shares of Accelya Solutions was announced.
The announcement was
pursuant to acquisition by overseas based PEs (Aurora, Vista and others) from
another overseas based PE (Warburg Pincus) of 74.66% of the Equity shares of
Accelya Solutions. Open offer price is Rs. 956.09 (price Rs. 944.19 plus some
interest on DPS delay).
2.
EARLIER OPEN OFFER: It is
relevant to mention that in February 2017, Warburg Pincus had done an open
offer at Rs. 1250, the offer completely failed and just 171 shares were
tendered, as investors felt that Rs. 1250 was too low a price for a company
doing so well, the investors chose to retain their shares. Strangely, the
company has continued to improve its performance since then, but price is now even
lower at Rs. 944.19 per share. Needless to say, investors are deeply distressed
and feel cheated.
3.
PRICING OF THE OPEN OFFER: The
normal Sebi formula does not work here as Accelya Solutions is classified as an
infrequently traded share as per definitions of the relevant Sebi regulations
and the Acquirer has to decide the valuation based on their own valuation.
Section IV of the DPS
gives how the price is arrived at for the Open Offer. Relevant extracts are
reproduced in Annexure I for ready reference. On the face of it, it is
difficult to contest the methodology outlined; the merchant bankers have given
a price of Rs. 944.19 for the open offer, as elaborated in point 1 above and
using the methodology as given in Annexure I.
4. OUR INDEPENDENT VALUATION:
We took all the IT Software companies with market cap between 1000 Crores to
5000 Crores as on July 19 2020 (Accelya Solutions market cap is currently app.
1500 Crore). Interestingly, we find that the PE multiple of Accelya Solutions
is almost HALF of the PE multiple of its peer group. Obviously the market price
of Accelya does not reflect its fundamentals (by the merchant banker’s own
admission in the PA and DPS), it is an “infrequently traded share”. Then how
can the 60 day price enter into the valuation metrics in the first place ?
5.
VALUATION USING PE MULTIPLES: The
comparable companies’ data (Peer Group) as on July 19 2020 is as below:
Accelya
Solution’s audited PAT that was available on the date of the PA ie on November
14 2019, was for the full year ending June 30 2019, these were approved by the
Board on August 28 2019, a little over two months before the PA. Hence these
results are also likely to be truly ‘true and fair’ and without the hangover of
an SPA that was probably subsequently negotiated. The Audited Consolidated PAT for
year ended June 30 2019 was Rs. 106.38. Crore
Multiplying the
peer PE of 25.01 as per above table and a PAT of Rs. 106.38 Crore, this gives a
fair equity value of Rs. 2660.56 Crore on the date of the PA or Rs. 1782.50 per share. THIS
IS USING THE PE VALUATION OF COMPARABLE COMPANIES.
6.
VALUATION USING EV/EBITDA
MULTIPLES: A second method often used by Merchant Bankers and Investment
Bankers for valuation is using the EV/Ebitda multiple. Here this multiple is
closer to the peer multiple. Using an EV/Ebitda multiple of 7.93 as per last
column of above table and the Audited Ebitda of Rs. 178.70 Crore for the year
ending June 30 2019, we arrive at a valuation of Rs. 1417 Crore on the date of
the PA or Rs. 949.42 per share.
THIS IS USING THE EV/EBITDA VALUATION OF COMPARABLE COMPANIES.
7. REVISED INDEPENDENT VALUATION: Giving equal weights to the two
valuations arrived at in above points 5 and 6 ie Rs. 1782.50 per share and Rs.
949.42, we get a fair valuation of Rs. 1365.96 per share. Add Rs. 11.90
interest for delay in releasing DPS, as proposed by the company, we get a fair price of Rs. 1377.86 per
share.
8.
60 DAYS PRICE: The question of
using Rs. 900.18, being the 60 days VWAP before the date of the Share Purchase
Agreement signed between the Acquirer and the earlier Promoter (Baring), does
not even arise. Reasons for the same are elaborated in point 4 above. In
Section IV of the DPS, the merchant banker has given a table under para 5
talking about the 60 day VWAP and then concluded that this is “Not Applicable”,
then how can the independent valuer use this price ? That too knowing fully
well that the market price of an infrequently traded share may not be reliable
anyway, which is further corroborated by the PE multiple comparable in above
table.
At best one could have
considered the price paid by the Acquirer to Warburg Pincus, but that price is
not known or disclosed in the PA or DPS. Hence the price of Rs. 1377.86 appears
to be a fair price.
9.
REVALUATION ORDERED BY SEBI: It
may be mentioned that on February 14 2020, Sebi wrote to the Merchant Banker
(JM Financial) informing them that Sebi has appointed an independent valuer to
compute the price of the open offer. Over five months have passed, but the
merchant banker is not responding to our request for information on this Sebi
appointed valuer’s report. Hopefully, they will suggest a price not too far
from the price of Rs. 1377.86 determined above.
ANNEXURE I: EXTRACT FROM DPS, SECTION
IV, “OFFER PRICE”
“The price of INR 944.19 per Equity Share is the higher of
(i) the price per Equity Share of INR 944.19 as per the report dated November
19, 2019 issued by MSKA & Associates, Chartered Accountants, and (ii) the
price per Equity Share of INR 939.07 as per the report dated November 19, 2019
issued by Bansi S. Mehta & Co., Chartered Accountants. An overview of the
methodologies used as per the respective reports is summarized below:
MSKA & Associates, Chartered Accountants
MSKA & Associates, Chartered Accountants (Address: Floor
3, Enterprise Centre, Nehru Road, Near Domestic Airport Vile Parle (E), Mumbai
– 400 099, India; Tel.: +91 22 3332 1600; Fax: +91 22 2439 3700; and firm
registration number: 105047W), in its valuation report dated November 19, 2019,
has arrived at the fair value of Equity Shares of INR 944.19 per share based on
the market price method and the comparable companies multiple method.
The market price of the Target Company has been calculated
based on Volume Weighted Average Market Price (“VWAMP”) of the equity shares of
the Target Company for a period of 60 trading days upto the Valuation Date i.e.
November 15, 2019. Under the comparable companies multiple method, the average
Price to Earnings (PE) multiple has been arrived at by considering the 60
trading days VWAMP of the comparable companies and the normalized profitability
of the comparable companies based on the trailing twelve month (TTM)
financials. This average PE multiple has been applied to the TTM normalized
profit after tax of the Target Company to arrive at the equity value of the
Target Company, which is then divided by the equity shares outstanding to
compute the equity value per share of the Target Company.
MSKA & Associates has applied equal weights to the
methods to arrive at the equity value per share of the Target Company. More
specifically, the value calculated under the market price method is assigned a
weight of 1 (one) and the value calculated under the comparable companies
multiple is assigned a weight of 1 (one).
Bansi S. Mehta & Co., Chartered Accountants
Bansi S. Mehta & Co., Chartered Accountants (Address:
Metro House, 3rd Floor, M. G. Road, Dhobi Talao, Mumbai 400 020, Maharashtra,
India; Tel.: 91-22-22014922; Fax: 91-22-22050147; and Firm Registration Number:
100991W), in its valuation report dated November 19, 2019, have arrived at the
fair value of Equity Shares of Rs. 939.07 based on the (i) Market Price Method,
(ii) Comparable Companies Multiple Method (based on Enterprise Value (“EV”) to
Earnings before Interest, Tax, Depreciation and Amortization (“EBIDTA”)
multiple (“EV/EBITDA Multiple”) method and Price to Earnings (“P/E”) multiple
method), (iii) Income Approach based on Capitalization of Profit After Tax (“PAT”)
Method.
The market price of equity shares of the Target Company has
been based on the volume weighted average market price on NSE over a period of
sixty trading days up to November 15, 2019 (Valuation Date). Under the
Comparable Companies Multiple Approach, Bansi S. Mehta & Co. has used the
EV/EBITDA multiple method and P/E Multiple Method to derive the fair value of
the Target Company. Bansi S. Mehta & Co. has considered EBITDA, PAT, EV and
adjusted market capitalization of comparable companies. The above parameters
have been used to arrive at average EV/EBITDA and P/E multiple for comparable
companies. Bansi S. Mehta & Co. has relied on the data of EBITDA and PAT of
the Target Company, as is emerging from the latest available financial results
of the Target Company as on the Valuation Date.
Under the PAT Capitalization Method the Target Company’s
adjusted PAT has been capitalized considering assumptions for growth and the
cost of equity to arrive at the business value.
Bansi S. Mehta & Co. has arrived at the fair value of
equity shares of the Target Company by applying equal weights to the value
derived under the Market Price Method, Comparable Companies Multiple Method and
Capitalization of PAT Method
