A minute for your Feedback please

Tuesday, February 14, 2012

Praful Patel sells his BSE listed shell company for $50000 to Gopal Shekawat-interesting timing

While reading the Financial Express edition dated 10th Feb 2012, I noticed a public offer for this unknown company 'Parekh Distributors Ltd'. What prompted my attention while skimming through the offer document was the small size of the offer(Rs 2.5lakh for purchasing 25000 odd shares of public at Rs 10/share) and the name of the seller-powerful NCP politician and former aviation minister Praful Patel. That alone, coupled with the interesting timing(aviation crisis, impending elections) prompted me to take a closer look at the transaction.

The buyer-Gopal Mohansingh Shekawat is described as a 45year old businessman. The object of acquisition as detailed in the letter of offer(http://www.sebi.gov.in/cms/sebi_data/commondocs/parekhdps_p.pdf)  are detailed below but basically intend using it as a shell vehicle.
The object of acquisition is to expand the business horizon under corporate status for diversifying
into different activities subject to approval of the shareholders
. The Acquirers reserve the right to
modify the present structure of the business in a manner which is useful to the larger interest of
the shareholders...

Interestingly, the present sellers had themselves acquired their 74.5% stake through a similar open offer in 2007(read about it here-http://www.sebi.gov.in/takeover/public/parekhpa.pdf) when they had purchased their shares for Rs 5. Hence, they have realized a 100% capital gains in 4years, around 18% CAGR which is a good return albeit small in monetary terms. Then also, the intent was The Acquirers propose to use the Target Company as a vehicle for developing business activities in various areas in which the Acquirers currently have an interest such as real estate, pharmaceuticals etc. The Acquirers may also consider using the Target Company or new businesses based upon the opportunities from time to time. As per the offer document, Mr Patel's then business interests included diverse interests in tobacco, bidis, agriculture, packaging, pharmaceuticals, finance, real estate. However, the minority shareholders did not accept the open offer and maintained their stake at 24.5%, which Mr Shekawat is now trying to purchase.

By any standards, this is a bargain basement price for acquiring a listed company-as setting up a company nowadays needs Rs 5lakh+ capital investment upfront, besides the various fees/formalities/stamp duty/listing fees/merchant banking fee etc-which could easily amount to Rs 20lakh+take upto a year. And then, the open offer would just take 2 months for completion, which is much faster than setting up any other legal vehicle. For anyone seeking a reverse merger of existing business interests, such fast formalities and ready business vehicle would carry its own value.   Hence, on a replacement cost basis, the value of the shares is much more than the Rs1/share valuation opinion given by BY&Associates.

Besides the low transaction costs, what is interesting is the transaction timing, and the names of the parties. The Bombay Municipal Corporation(BMC) and UP elections are approaching, so has Mr Patel decided to divest the stake to avoid any accusations later on(the amount is too small to have been done for liquidity reasons)? Also, a google search shows the name of a Congress MP as Gopal Shekawat(and also Pratibha Patil's spouse has the same surname & belongs to the Congress, so could be a relation). Whatever the reasons, there is more to this deal than meets the eye.

No comments: