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Krishnan Thiagarajan

SHAREHOLDERS of e-Serve International may bid at Rs 1,050 to sell their shares to the Citigroup through the reverse book-building offer. The Citigroup has offeerd to buy out all the outstanding equity and intends to delist from BSE and NSE. It may be prudent for investors to put in these bids nearer to the bid closing date of August 19. The exit price will be the price at which the maximum number of shares are tendered.

Monitoring the bids and bidding at the indicative price nearer the closing date may be appropriate as the outcome of this offer hinges on the institutional investors, who hold a stake of 31.3 per cent. Participation of these investors will be crucial for this offer to succeed. This offer will succeed and Citigroup will be in position to apply for delisting from BSE and NSE, if the public shareholding falls below 25 per cent. Citigroup already holds 44.3 per cent in e-Serve. If all the institutional investors tender to this offer, it will take Citigroup's shareholding, post-offer, past the 75 per cent delisting threshold and the offer will sail through.

Second, institutional investors may be better equipped to gauge growth prospects in the IT-enabled services industry to arrive at a fair exit price. In any case, the price of Rs 800 as the indicative price payable by Citigroup has no relevance as a benchmark, as the stock price has shot past that level and trades at Rs 905. The acquirer has the right to reject the price discovered through this process. If we assume that the institutional investors will help discover the best exit price and the offer succeeds, the acquirer is required to buy the remaining equity at the same exit price for all the other shareholders within six months following the date of delisting.

At the current market price, e-Serve commands a price earnings multiple of 25 times its per share earnings of Rs 36 of 2003-04. If we assume that the per share earnings will grow at 48 per cent in 2004-05, same as 2003-04 and apply a PEM of 20 times, the indicative price for participating in the book building process works out to about Rs 1,050.

The only listed benchmark that we have at the moment is Datamatics Technologies. It is not comparable with e-Serve. First of all, it is a third-party IT-enabled service provider and the dynamics driving this business is completely different. Second, as it was listed only recently, it has a limited trading history.

The stock has run-up by over 40 per cent since April 8, the last trading day before the voluntary delisting offer was announced by Citigroup. The bid opened on August 13 and closes on 19. Citigroup Global Markets is the advisor and Kotak Mahindra, the manager to the offer.

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