The Hindu Business Line : Why Ranbaxy Labs stock is falling?

Share matters
Cost of buying three shares@ Rs 560 = Rs 1,680
Realisation from one share tendered = Rs 737
Cost of two shares = Rs 943
Break-even price before tax (Rs 943/2) = Rs 471

Kumar Shankar Roy

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A day after the deal, the market seems to have digested the Ranbaxy stake sale news and realised that the terms are not favourable for public shareholders. . The stock fell 3 per cent to Rs 543 on the BSE today, when the general expectation was that it would race ahead to Rs 737 per share, the price that Daiichi Sankyo has agreed to pay the promoters.

Why this contrarian behaviour?

There are three main reasons for it. First, the likely low acceptance ratio, that is, the ratio of open offer quantum to public shareholding; second, the capital gains tax liability on shares tendered through the open offer route; and finally, the 30 per cent dilution in equity as a result of the preferential offer to Daiichi Sankyo.

In the open offer that Daiichi will be making to the public shareholders of Ranbaxy, the acceptance ratio will be just over 34 shares for every 100 held, going by Ranbaxy’s shareholding pattern.

Assuming that the open offer follows the preferential offer to Daiichi, it will be for 8.5 crore shares (20 per cent of diluted equity of 42.7-crore shares) only. Against this, the public hold 25-crore shares, which mean that roughly only one in three shares will be accepted in the open offer.

Hypothetical example

Let’s take a hypothetical example of a shareholder who has bought 3 shares just before the deal was announced at Rs 560 a share. What should be his action? Given the likely open offer acceptance ratio of 1:3, he can make profit if he sells the remaining two shares at any price above Rs 471. To be sure, the break-even price (before tax) will change based on the buyer’s acquisition price; lower the acquisition price, lower the break even.

Secondly, investors tendering through an open offer will also have to bear a higher incidence of tax, when compared with selling in the open market. The short-term capital gains for such investors will be taxed at their applicable tax rate and long-term gains will be taxed at 10 per cent. This explains why the open market appears to be an attractive platform to sell the Ranbaxy stock, rather than in the open offer.

It is not surprising then that 1.42-crore shares were cumulatively traded on Wednesday and Thursday at the BSE; substantially higher than normal volumes seen in the stock.

Finally, the market also appears not too enthused by the 30 per cent dilution in equity caused chiefly by the preferential offer to Daiichi Sankyo and also due to the expected conversion of bonds and allotment of shares when employees exercise stock options. Post-deal, the equity is expected to be around 48.6-crore shares, of Rs 5 each (face value). This will dilute minority shareholders’ stake and also put pressure on medium-term earnings per share.

Related Stories:
Ranbaxy: ‘Bought on rumour and sold on news’
Daiichi Sankyo to buy 51% in Ranbaxy at Rs 737/share

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