For the domestic cigarette manufacturers, this season, there seems to be a lot more in the air, hostility being one of them. After the government's ban order on advertisements by Tobacco manufacturers and their withdrawal from the sponsorships of all kinds of sports events, thereby impacting the brand visibility of their products, the hostile bid by raiders Damani brothers on VST Industries have created enough storm in the filter tube of the industry. And, even before one could start thinking about what is in store for the bewildered manufacturers, the smell of the hostility has pumped up the stock price, which has gained substantially, cheering up the opportunity grabbers, bargain hunters and onlookers alike. The stock was up 8% on both NSE and BSE on 14th Feb, 2001, the day after the news broke in. It closed at Rs 111.50 on BSE on Friday, 16th Feb, 2001, just below the offer price of Rs 112, the raiders have announced. The Rs 750-crore VST Industries is the manufacturer of some of the well known brands like "Charms" and "Charminar". The company commands a 13% share of the domestic market. Cigarettes account for nearly 93% of its turnover while unmanufactured and cut tobacco accounts for the rest. The company is the largest exporter of cigarettes to the Middle East from India.

Raiders and the object of interest

Bright Star Investment Ltd has submitted a draft offer letter to the Securities and Exchange Board of India (SEBI) for making a public announcement to acquire 30.88 lakh equity shares amounting to 20 per cent holding in VST Industries. Bright Star, a Mumbai-based investment company controlled by Mr. Radhakishan S Damani and Mr. Gopikishan S Damani, currently holds 23.1 lakh equity shares of Rs 10 each of VST, representing 14.97 per cent of VST's paid-up ordinary share capital of Rs 15.44 crore. These shares were acquired during the last 12-month period at the highest price of Rs 110.55 and average price of Rs 87 per share. VST's total paid-up capital stood at Rs 23.44 crore as on 31st March, 2000, comprising 1.54 crore ordinary shares of Rs 10 each fully paid-up and eight lakh cumulative redeemable preference shares of Rs 100 each fully paid-up. The parent of VST, British American Tobacco (BAT) currently holds around 32 per cent stake in VST, the Andhra Pradesh Government around 4.5 per cent, Bright Star 14.97 per cent, while the balance is held by financial institutions and the public.

Bright Star proposes to acquire VST shares from the public shareholders at a price of Rs 112 per share. The offer price is higher than Rs 100.5, which is the average of the weekly high and low of the closing prices for the shares of VST as quoted on the NSE, where the VST shares are mostly traded. The offer price is also higher than the highest price paid by Bright Star for any acquisition of VST shares during the 26-week period prior to the public announcement.

During the last fiscal year, in a move to improve its liquidity, VST transferred its entire shareholding in VST Natural Products together with its assets for a consideration of Rs 19.62 crore. It had also realised Rs 12.5 crore upon disposal of certain investment held by it and one of its subsidiaries. By selling a property, it had realised a further sum of Rs 5 crore during 1999-2000. VST currently has six subsidiaries under its fold - Hallmark Tobacco Company Ltd, Hallmark Investments Ltd, Tobacco Leaf Investments Ltd, Vazir Investments Ltd, VST Distribution, Storage & Leasing Company Ltd and Tobacco Diversification Investments Ltd. Following the transfer of entire shareholding in VST Natural Products, it ceased to be a subsidiary. As on 31st March, 2000, the company has an authorized capital of Rs 6 crore, paid-up capital of Rs 3.93 crore and reserves and surplus of Rs 51.17 crore.

15th Feb has been decided as the specified date for the purpose of determining the names of the shareholders to whom the letter of offer would be sent, whereas the open offer begins on 30th March to close on 29th April.

Igniting the stock price

The raiding act had enough fuel to ignite the stock price, which spurted on both the stock exchanges and hit the eight per cent circuit filter to close at Rs 95.65, as the news of the open offer trickled in. The shares of VST Industries, which closed at Rs 88.60 on Tuesday 13th Feb 2000, saw only buyers on Wednesday and shot up to a high of Rs 95.65 on the BSE. The counter was frozen after just 62 shares were traded. On the NSE, the stock witnessed higher activity, 1,100 shares changing hands before it was frozen at Rs 95.35. The open offer for 20 per cent stake in the company was at a 26 per cent premium to the closing market price of the stock at Rs 88.60 on Tuesday, before the announcement was made. After Wednesday's eight per cent surge, the gap further narrowed down and the open offer was at a 17 per cent premium over today’s market price. The Damani brothers already hold 14.97 per cent of the equity of the company through their investment vehicle Brightstar, while the UK-based BAT group has 32 per cent stake in the company.

Government: To smoke away the raiders or not

The hostile bid by Damani Brothers may put government in a tight spot if British American Tobacco plc (BAT) makes a counter-offer for VST Industries. Though the current policy permits 100 per cent foreign direct investment in tobacco companies, the industry ministry is guided by an in-principle decision to discourage fresh foreign investments in the sector. The policy to allow 100 per cent FDI was announced through a press note in 1998. But commerce & industry minister Murasoli Maran had subsequently informed Parliament that no fresh cases of FDI had been cleared because of health concerns and other related issues.

Proposals of the erstwhile Rothmans, FTR Holdings (a Philip Morris subsidiary) and BAT (for subscribing to a rights issue in VST) had been kept in abeyance by the government over the past years. However, as the press note has not been rescinded, BAT is free to seek an FIPB nod for increasing its holding in VST to 52.16 per cent. It already holds 32.16 per cent. Industry expects BAT to come up with a counter-offer to Brightstar Investments for a 20 per cent stake in VST. However, when it comes to buying the shares, the scheme will have to be cleared by FIPB since it will involve fresh FDI.

Shareholding

The gameplan

The raiders view VST as undervalued and see better prospects for the company, post-restructuring, which saw it getting rid of loss-making businesses of financial services and the agro-processing division. The raiders have claimed to be investing in VST for the last two years and the open offer is a natural outcome as their holding in the company has reached the 15 per cent trigger limit. The Sebi rules require anyone who has acquired 15 per cent of a company’s stock to make an open offer to all shareholders. Theories doing the rounds are, one, Damani brothers have attempted a hostile bid on VST expecting that VST's overseas parent, BAT, would not be able to counter their move and they could have a smooth sailing. The reason being - as per the existing norms, BAT would have to seek specific approval from the Foreign Investment Promotion Board (FIPB) to increase its stake in the Tobacco Company. However, its earlier attempts to get such approval were rejected twice. To retain control over VST, BAT needs to seek fresh FIPB approval to make a counter-bid, which has to be made within 21 days from February 15 as per the takeover regulations of the Securities & Exchange Board of India. As per the second theory, the tobacco industry expects to get some relief from the forthcoming budget where it expects the Government to announce inclusion of tobacco in the list of automatic approvals for foreign direct investment, probably with a maximum cap of 51 per cent in equity. If it happens, this could mean a windfall for the industry. Currently, FDI in tobacco companies requires specific approval from the FIPB.

The taste of Puff

The takeover move by Damani brothers could also be a ploy to warehouse the shares and offload it at windfall prices. In either of the two cases, the raiders could be in a win-win situation. And, going by the way the recent hostile attempts at some of the old economy czars like Bombay Dyeing and Gesco have turned shape, it is most likely that the present hostility could also be a mean to reap rich dividends via warehousing. This is vindicated by the fact that raiders have expressed their unwillingness to run the management of the company.

FIs hold over 26 percent share in VST, which gives them tactical power of blocking any board resolution. And they will be a key player in the takeover tussle. It would be interesting to watch the battle of wits and nerves between the two sides with referee FIs playing a crucial role. If it reminds you the war fought between Indal and Sterlite a couple of years ago, where the parent of former, Alcan, came to the rescue of its kid and won a close fight, you are in for another exciting game of hostility. Watch out. 

Amit Singh

Feedback

Rate this article