Wednesday, 26 September, 2007

IFCI strategic stake sale may get derailed

IFCI is in trouble, one may ask what's new, its been that way for the lat 9 years. But 9 years hence, ever wondered what could be one thing that could derail the entire restructuring process at IFCI?

IFCI is in trouble, one may ask what's new, its been that way for the lat 9 years. But 9 years hence, ever wondered what could be one thing that could derail the entire restructuring process at IFCI - And with short of shooting myself in the leg I would say the very speculative activity that has taken the IFCI stock price beyond Rs 100. I say it because the more I speak to people around the process the more I sense the apprehension at the way the IFCI stock has been moving.

The art of strategic turnaround hinges on what price is the asset been acquired for. Will the investor turnaround the institution in 3 years and will it generate returns during this period. As I look at it IFCI for long has been the most speculative stock in the last 6 months at least. For a stock trading below par and rising 10 times to over Rs 100 in a year is as alarming as it can be. And this despite the fact that it still does not have the capital adequacy to lend, the profit it declares is out of asset sales and NPA recoveries, and above all which will continue for another two years atleast.

A few months back we had a leading daily naming Barclays as suitable bidder and valuing IFCI at Rs 85. But as we stand at a point of shortlisting (Only 10 turned up) investors who submitted EOI, NO one yet has bothered to ask where is Barclays including the financial daily that named Barclays. The stock has moved from a 52 week low of Rs 9.30 to a 52 week high of over Rs 105 per share. Has anyone asked Barclays why it didn't bid and if it did not intend to bid on what basis it valued IFCI at Rs 85 per share.

That said, let me get to the most disturbing fact - Derailment of the IFCI restructuring. IFCI has been posting profits for the last 2 quarters, and this has been one thing that has turned on the fancy of the investor. But even more disturbing is the fact that this fancy has turned into an irrational speculation on the stock that may eventually see all investors withdrawing from the process.

Two key details that one should realise is that, First, the strategic investor if and when he puts in a bid will have to follow the SEBI preferential issue guidelines. And secondly they will have to follow the Open Offer guidelines as per SEBI norms. In both cases, the guidelines are clear, the acquirer will have to pay a price that will be an average of 6 month price or 15 day average price or whichever is higher. The more the speculative action pushes the price up, the more expensive IFCI becomes and so the further the investor is likely to move away from the restructuring.

In August this year, a 26% stake & open offer would have cost the investor little over $ 367 m, today at current market price of over Rs 100 the cost of the acquisition would be over $ 734 m. As if the street buzz is anything to go by, by the time the financial bids are invited in November this year, the cost would touch close to a $ 1 bn. BUT is the investor willing to shell out nearly a billion is a question that I am told even the IFCI management is afraid to answer. Leave alone the people who are closely associated with the process.

One might argue that the market forces determine the intrinsic value of a company, but one should realise that market can't force a strategic investor to pay a price that it may think is irrational and influenced by undue speculation in the market. At nearly $ 1.5 billion market cap it is even more important for the company and its administrator to decide whether they indeed want to safeguard the process which is under threat from speculators that I feel don't understand even the basics of the company.

The board of IFCI is all set to announce the shortlisted investors that would go ahead into the due diligence process. But as these investors enter the second phase the challenge is yet to come and the skeletons yet to come out. The first would be the interest subsidy that the government gives to IFCI for servicing debt that have been rolled over for over 10 years at interest rates as low the Japanese interest rates.

The second would be the debt that IFCI owes to the govt, IDBI, PSBs. These debt have been converted into FCDs convertible at par as and when IFCI has positive networth.

The third biggest challenge would be the decision on grant that govt has decided to provide IFCI for few years and which has been part of the Budget. Would the government continue with the grant if a new management takes over the financial institution.

Fourth, it is almost certain now that in all probability a foreign investor or consortium will be the front runner for IFCI, considering it hardly had any domestic public sector bank envisaging interest. But will the foreign investor take the plunge considering that the cost of acquisition is likely to increase by nearly 2x by the time the preferential issue is made in Jan 2008. To make it simple to understand for

This is the first time perhaps that a financial institution undergoing a restructuring will pose challenge not only to the management, the stock exchanges, the regulator, the advisors and potential investors. Can IFCI trading be suspended pending completion of the process & preferential allotment. If that happens what happens to shareholders some may ask, if the current price is overvalued this price is atleast assured to the shareholders, if IFCI is undervalued the investor's bid will reflect the same. In both the case, the open offer will be available to the minority shareholders. But that is only if the intention is ensure a safe completion of process. The chances of which are diminishing with every rise in price. Who will take that decision?

Whatever, the market may value IFCI at, it is highly likely that there might be a mismatch in the making. And the fear is just getting worse for the people associated with the restructuring process.