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The Original CHAUKIDAAR ,“TAKEOVER WATCHMAN” since 2007. CA. Arun Goenka* hands-on experience in the share market* deep knowledge of laws and account*one of the early players, pioneered an investment strategy in TAKEOVERS*The WIRC - of The Institute of Chartered Accountants of India, has honoured him with the ‘Recognition of CAs in Social Service’. * often invited by National business news; electronic and print media, for his views on SEBI related matters. * history of red-flagging 100+ cases to SEBI* contributes by giving inputs in drafting amendments to the regulation* Some of the suggestions reflected in subsequent regulatory changes: (a). In takeover of Cairn 3,750 Crores non-compete fees waived off and ultimately Removal of Non-compete fee in 2011 (b) November 2009 amending Regulation 11 (1). (c)Listing agreement baring promoters from voting on related party. (d) Disclosure of past performance by merchant bankers in case of IPO (e) SAST 2011 regulation 10(1)(h), (f) Counter Offer in case of Delisting (g) Interest payment to all in case of delays in Open Offers(05.06.20).

Sunday, August 23, 2020

UNDERVALUATION OF ACCELYA SOLUTIONS OPEN OFFER

 

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

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