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Raghuvir Srinivasan

THIS open offer from the promoters of Rane (Madras) is part of a restructuring of their equity holdings in the group. The scheme of restructuring is unfavourable to the fundamental interests of Rane (Madras) and the shareholders may be better off exiting the stock. Since the current market price (Rs 154) is higher than the offer price of Rs 147, shareholders may opt to sell their holdings in the market.

The open offer is being made consequent to a complex restructuring exercise involving the group companies — Rane Engine Valves, Rane Brake Linings, Rane (Madras) and its subsidiary Rane Investments. The aim of the restructuring is to consolidate ownership of all the group companies in Rane (Madras) which will eventually be bifurcated into two companies. — As per the restructuring plan, the promoter group will sell its holdings, aggregating to 19.05 per cent in Rane Engine Valves to Rane Madras, Rane Investments and Rane Brake Linings. In return, they will be issued two shares in Rane (Madras) of Rs 146 each and cash of Rs 118 for every share of Rane Engine Valves sold by them. The terms of the restructuring appear unfair to the public shareholders of Rane (Madras) as its equity will double from Rs 4.19 crore to Rs 8.13 crore. The bloating of the equity will be purely for non-business reasons which means that there will be a sharp fall in the return on capital employed.

There is no cash flowing into the company even as there could be a cash outflow along with the additional shares being issued. All that Rane (Madras) will get in return is the 19.05 per cent stake in Rane Engine Valves.

To make matters worse for shareholders of Rane (Madras), the market valuation of Rane Engine Valves, has fallen in the seven months since April when the restructuring plan was finalised. Every share of Rane Engine Valves was valued at Rs 410 then; it is traded at Rs 392 now in the market.

Thus, for each share of Rane Engine Values being sold by the promoters now, they will get two shares of Rane (Madras) worth Rs 316 (current market price of Rs 158 per share) and cash of Rs 118 which will add up to Rs 434.

Shareholders in Rane (Madras) should consider exiting through the market route capitalising on the higher valuation available now. Though there are some positive factors strictly from a business perspective such as the boom in the automobile industry and the turnaround registered by the company (net profit of Rs 3.26 crore in first half of 2004-05 compared to loss of 0.68 crore in the same period last year) it may be prudent for shareholders to exit the stock.

There is still the second part of the restructuring [bifurcation of Rane (Madras)] that will be done once the open offer is through and there is no saying how the terms of that will be.

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