The Government seems to have taken a bit of a chance with the REC follow-on issue. For sure, the number of shares it?s going to sell is much smaller than it was with NTPC. But retail investors may not bite because, once again, the discount offered at the time of pricing was 7.75%, not much more than the 5% for NTPC. In fact, the discount has already dropped to 5% with the REC price down to Rs 214 and the intra-day low on Thursday at Rs 205. So while no one?s asking for a 20% discount, 12% or so would have provided some cushioning. REC, after all, is nowhere as liquid as the NTPC counter and neither is the story half as attractive as NTPC?s.
In trying to mop up close to Rs 8,300 from NTPC, a chunk of the stock, nearly half the shares offloaded, has been pushed into the hands of two big investors, which is never a good thing. Indeed, the French auction sometimes ends up leaving a large chunk of shares in the hands of one investor who may have paid a very high price, again not desirable, especially with stocks that don?t have very large free floats. In REC?s case although the government ?s stake will come down from 81% to some 67% of the equity capital, the free float is already small. If the markets turn weak, the government could end up losing more in the valuation post-listing given the relative illiquidity of the counter. Also retail investors seem to be hesitant to invest right now so let let more institutions buy. At least the shareholding will be more-based.
Big not beautiful
Even in the past, the Street has never liked big-ticket acquisitions and it isn?t about to warm up to them now. When Tata Steel announced it had bought Corus, the stock crashed some 14%. Hindalco was meted out similar treatment when it bought Novelis and the Tata Motors stock went all the way back to the lows of 2001 in the bear market that followed its buyout of Jaguar and Land Rover. Analysts have a point; suggests that synergies take time to come through and it can be decades before companies make a decent return on their investments, but market capitalisation takes a hit almost immediately. So it wasn?t surprising that the Bharti stock got pummelled when the Street heard it was going to buy telco Zain?s African assets for $10.7 billion. That?s a valuation of 8 times Enterprise Value/ebitda for 2010 and not justified given that the growth for Zain?s African portfolio seems unexciting and the fact that the leveraging could stress the balance sheet. Moreover, earnings could get diluted by anywhere between 10% and 15%. Again, the Street?s happy that Reliance Industries may be out of the race for Lyondell Basell, for which it had offered $13.5 billion. Goldman Sachs points out that even though there may be strategic merit in the acquisition, the bid not going through is a better outcome than RIL getting drawn into a bidding war and eventually overpaying for the assets. While there?s little danger of Reliance overpaying, Sunil Mittal will need to work hard to prove that he?s made the right call.