In its AGM notice, IBP has proposed to raise Rs 350 crore through a rights issue and/or private placement and/or public offer apart from the originally conceived 37 lakh equity shares. Reports indicate the government would renounce its rights in favour of stand-alone refineries like Madras Refineries and Cochin Refineries. This renunciation holds the key to the profitability of these refineries.

Although IBP looks like a peripheral player having a market share of only 7 per cent in the north, 5 per cent in the east, 4 per cent in the west and 3 per cent in south, it has the highest throughput per retail outlet. The throughput of 2,202 metric tonnes per annum per retail output is double the that of IOC's at 1,114 metric tonnes per annum. Margins in marketing of refined products are always three to four times the margins for production of these products, and in a free market, the profitability would be depend more on marketing. The government's move would give the stand-alone refiners a chanceto gain access to an established retail network.

What is important, however, in the final analysis is the rights ratio and the premium at which the rights are offered. Based on the present capital structure, a 1:1 rights issue option would result in government holding falling from 60 per cent to 28 per cent. In addition, the premium works out to around Rs 80, which is extremely attractive considering the present market price of around Rs 100-Rs 110. Another option for the company would be to go in for a private placement and/or a public offer.

In this case, the government stake would fall to 20 per cent. On the other extreme, IBP could choose to issue the rights in the ratio of 1:9. In such a scenario, the centre's stake does not fall below 51 per cent, even if it renounces its rights to a strategic investor. At a premium of Rs 160, IBP can still get targeted the Rs 350 crore. Despite various permutations, it is unlikely for the centre to reduce its stake below 51 per cent, as IBP is in the coresector.

Infac estimates the value of 200 retail outlets works based on putting up greenfield investment and associated income stream for ten years at Rs 448 crore. Extrapolating, the value of IBP's retail network would work out to Rs 3,229 crore. Considering that the strategic investor would be shelling out around Rs 210 crore for buying the government stake in case of a rights at 1:1, he would be getting the entire network at 6 per cent of the value of the network. None, including Reliance, CRL and MRL would like to miss the opportunity.

But if the ratio is at the other extreme at 1:9, the centre would maintain its holding at 51 per cent and the valuations would not look attractive. A 1:5 ratio would give the strategic investor a stake of 10 per cent of the share capital, but would not enthuse him to go ahead as he would not be sure if he would ever get a controlling stake.

Maxworth Orchards:

News reports confirm that KG Krishnaswamy and his associates have assumed control of MaxworthOrchards (India). Krishnaswamy, a landlord who owns over 300 acres of land in Andhra Pradesh, is believed to be acting at the behest of the takeover artist P Rajarathinam. As Rajarathinam is also believed to have set his eyes on another company promoted by R Subramanian, Maxworth Orchards (International), a formal announcement to the effect that Krishnaswamy has acquired this company, too, is long overdue. Krishnaswamy's close involvement with the company has already been reported.

Maxworth Orchards (India) is engaged developing vast tracts of agricultural land and selling it in small units. It converts these units into planted orchards, maintains them and sells the produce on behalf of the investor. In the process, it earns for itself a service income. The company did quite well in the first three years of operations (1993-94 to 1995-96), but ran into trouble after that and began to make losses from the second half of 1996-97. Its current problems are mainly a result of the large stock of unsold landscreated due to poor sales.

Maxworth Orchards (International) has also been facing financial problems. However, anybody considering the acquisition of Maxworth Orchards (India) would also tend to take a look at Maxworth Orchards (International). This is because, there are a number of synergies between the two and these can be gainfully exploited. While Maxworth Orchards (India) is in the business of developing, selling and maintaining orchards, Maxworth Orchards (International) is engaged in the export of farm fresh fruits and vegetables and pickled gherkins. Thus, while one company produces fruits and vegetables, the other exports the products.

Merging the two firms might be a good idea not only due to the current synergies, but also because their future expansion plans are similar. Both want to enter into food processing, an industry widely believed to have a high potential considering the growing urbanisation and demand for packaged processed foods. There is also a tremendous export potential forquality processed foods. Maxworth Orchards (International) has already been exporting to Australia, Canada, Sri Lanka and several European countries and this expertise can be extended to processed foods. If Krishnaswamy infuses fresh funds into the companies and merges them, he may be successful in turning them around.

It is still not clear how Krishnaswamy and his associates have managed to gain control of the companies. If they have bought over 10 per cent of equity, open offers have to be made. Since Krishnaswamy appears to have been in control of Maxworth Orchards (India) since January, an open offer for this company is long overdue.

Emcee (With contributions from Manish Saxena & Sarad Saraf)