Buybacks and Delisting

BUYBACKS AND DELISTING
Investment Banking
Buybacks and Delisting

Introduction to share repurchase/buyback Equity repurchase in India Regulatory framework for equity repurchase Buyback by unlisted public companies and private companies Buyback by listed companies Investment banking perspective in share buyback

De-listing of listed companies Voluntary de-listing Compulsory de-listing De-listing pursuant to a right issue Re-listing Comparative scheme of buy-back versus delisting

Introduction to share repurchase/buyback
Share repurchases are cash offers for outstanding shares of common stock Share repurchases change the book capital structure of the firm by reducing the amount of common stock

Introduction to share repurchase/buyback
Share repurchases are cash offers for outstanding shares of common stock Share repurchases change the book capital structure of the firm by reducing the amount of common stock

Implications of Share Repurchase
Correction of overcapitalization Shoring up management stakes Exit mechanism Shareholder value management

Equity Repurchases in India
Pre 1998 and post 1998 scenario Amendment to The Companies Act, 1956 Not for treasury operations

The main regulatory requirements are
The buyback has to be financed out of free reserves or securities premium account or from proceeds of the earlier issue Maximum time 12 months Declaration of solvency Securities to be destroyed 365 days of separation period between two buybacks No security issuance for next 2 years post buyback Direct purchase by the company.

Buyback of Listed Companies
Fixed price tender offer Book building method Open market purchases Other requirements
Minimum level of non-promoter holding No preferential allotment

Investment Banking Perspective in Share Buyback
Pricing of Buyback
Determined by the company in consultation with merchant bankers Fixed price to be decided beforehand under tender offer Maximum price in case of open market and book building method Price should cover valuation schedule of all class of shareholders
General principles of pricing

Premium to current market price Lower the current P/E multiple, higher the company can pay Lower the future RONW, higher can be the premium over CMP Decent IRR for the shareholders based on original issue price

Determinants of premium in buyback Calculation of premium The larger the premium offered over CMP, the larger the increase in the value of the firm upon the announcement. Increase in share price is permanent Distribution of value between existing shareholders and continuing shareholders

Given current P/E = 5, current EPS = 10, RONW =10%, capital employed = Rs. 100 mn, paid up capital = Rs. 10 mn (1 mn shares of Rs. 10 each) The company proposes to buyback 25% of paid up capital. Scenario analysis 1. Post buyback stock price when RONW remains constant 2. Post buyback stock price when RONW increases 3. Post buyback stock price when RONW falls.

Fixing the Quantum of Buyback
Initial stage buyback experience in US market Regulation in India draws three essential condition determining quantum of buyback
Buyback shall not exceed 25% of the total paid up capital Buyback shall not exceed 25% of the equity paid up capital The residual debt-equity ratio shall not exceed 2:1 after buyback. The equity for this purpose has to be reckoned as paid-up capital and free reserves.

De-listing of a listed company
Going private No public share holding and no trading of shares on exchanges Also associated with Leveraged Buy-Out in US Either voluntary or compulsory delisting Voluntary delisting a strategic alternative for companies

De-listing in India
A common occurrence More common among MNC subsidiaries Companies that have been delisted Philips India, Carrier Aircon, Wartsila India, Coates Viyela, Castrol India etc
De-listing Offer
De-listing offers are triggered off by weak market conditions wherein the cost of public equity is higher than that of private equity. De-listing offer requires providing the shareholder a better exit opportunity than that currently provided by the market. This involves paying a premium over the market price. In India, delisting offers have to be made through a reverse book building process. Fixed price de-listing offers are not permitted unless it is a forced de-listing.
De-listing Offer
De-listing that results due to a rights offer should be done only at the rights price. De-listing cannot be the result of a buyback offer or open offer. It can only be through a distinct and separate offer as per the requirements. De-listing offer is made by the promoters or substantial shareholders.
De-listing Offer
Reverse book building requires a floor price that cannot be less than the average of the opening and closing price of the share for 26 weeks prior to the date of the offer. The purchaser has to deposit 100% of the purchase consideration payable at the floor price. Bidding period should be at least three days. Cut-off price is determined through reverse book-building.
De-listing Offer
Purchaser may accept or reject the cut-off price. De-listing offer can fail if the cut-off price is not accepted or the required number of bids have not been put in. If the required number has been received but there are residual public shareholders, these need to be given six months to surrender their shares. All consideration to be paid for in cash and the shares bought back have to be cancelled. They cannot be re-issued. Re-listing of the company is not allowed until two years.
Buyback and Delisting

Regulatory Requirements for De-listing
SEBI (De-listing of Securities) Guidelines, 2003 applicable to
Voluntary de-listing sought by promoters of the company Any scheme of arrangement consequent to which the public shareholding falls below the minimum limit required for the company to stay listed Promoters seeking to de-listing a company from some of the stock exchanges Consolidation of holding by a person in control of the management in a manner in which the public shareholding falls below the minimum limit required for the company to stay listed Compulsory delisting of companies by the stock exchanges

Regulatory Requirements for De-listing
SEBI (De-listing of Securities) Guidelines, 2003 not applicable to
When a company makes a buy-back of shares in such a way that the public shareholding falls below the minimum limit required for the company to stay listed An open offer made by an acquirer pursuant to the Takeover Code due to which the public shareholding falls below the minimum limit required for the company to stay listed.

Share Buy-back Applies to equity shares, preference shares and other specified securities Governed by section 77A/77B and respective guidelines by MCA/SEBI De-listing Offer Applies to equity shares, preference shares and other specified securities Applicable to listed companies alone. Governed by de-listing guidelines of SEBI and stock exchange requirements.
Pricing determined by company as Fixed Price to be determined by only through Price/Book-Built Price/Open Market Price. reverse book building using Dutch auction No concept of minimum price. process. Quantum of buy-back restricted to specified amount. Quantum of shares bought back shall be the residual public share holding to enable delisting.
Company uses its funds to buyback.
Acquirers (including promoters) use their personal sources of funds to buy shares.

Share Buy-back Company cannot use proceeds generated from earlier issues to finance buy-backs. De-listing Offer No restriction on sources of funds since these are brought from outside the books of the company whose shares are being de-listed. To be used only if de-listing is contemplated.
Buy-back can not be used to de-list a company.

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BUYBACKS AND DELISTING