The Hindu Business Line : DSP Merrill Lynch: Tender

Investors in DSP Merrill Lynch can consider tendering their shares at the price of Rs 2,143 in the reverse book-built offer made by Merrill Lynch. For retail investors, tendering shares at Rs 2,143 makes sense. The offer price is slightly higher than the market price. If the de-listing bid fails, there is a strong likelihood of a sharp fall in price since within six months Merrill Lynch will have to sell a part of its stake to increase the public shareholding. Tendering the shares would have protected the value of your holding in such a scenario.

If the price discovered through the offer is substantially higher than the floor price of Rs 2,143, you will benefit since your shares will be bought at the higher price.

It is probable that a higher price will be discovered. This is because Merrill Lynch has to buy only about 5,11,000 shares or 2.27 per cent of the paid-up equity. It has already entered into an agreement with Mr Hemendra Kothari, co-promoter of DSP Merrill Lynch, to buy his stake of 47.73 per cent at a price of Rs 2,143 per share. If an investor controls a big chunk of the remaining stake and demands a meaningful higher price, Merrill Lynch may accept that price since it may not significantly add to the acquisition cost. For instance, if Merrill Lynch acquires the remaining stake of 2.27 per cent at Rs 2,700 then the total acquisition of the 50 per cent stake that is now held by others will increase from Rs 2,143 to Rs 2,168. That may not appear significant to Merrill Lynch.

Is the floor price of Rs 2,143 reasonable? Yes and no. That is the price at which the promoter, Mr Kothari, a man who probably knows the value of this company better than anyone else, exited. It is, therefore, not a bad price to exit at all.

At the same time, the price of Rs 2,143 discounts the earnings of the DSP Merrill Lynch for the year ended December 2005 only about 28 times. This earnings also includes only the securities broking, investment management and private wealth management businesses. It does not include the profits of the asset management subsidiary, which is poised for a dramatic take off in the years ahead even though it is earning only meagre profits now.

Since the merchant banking and securities broking businesses have all along enjoyed return on net worth of 30 per cent or more, there is a case for a PE of 30 for earnings from that business alone. This apart, a notional value of Rs 900 crore can be attached to the asset management business considering that most such businesses are now valued at 10 per cent of the assets under management. If this argument were taken, then up to Rs 2,700 can be demanded from Merrill Lynch as the fair price.

Under the circumstances, we only guess that a fair price can range between Rs 2,100 and Rs 2,700. Given the illiquidity in the counter, however, shareholders should take Rs 2,143 that is on offer. If they get a higher price then that would be a bonus.

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