Greenmail, winners and losers - the Gesco takeover battle

By C. R. L. Narasimhan

The culmination of one of the most vigorous corporate battles of recent times in India naturally calls for an identification of the winners and losers. The battle for the real estate - rich Mumbai company Gesco with a market price for its scrip that did not reflect either its book value or any other inherent strength, began on October 19 last with the AH Dalmia group of Delhi making a hostile bid for a 45 per cent stake at Rs. 27 a share.

This price was even less than half the book-value of the company (Rs. 54.50). Interestingly, the offer and the counter offer pushed up the bidding cost and in the end the predator, the AH Dalmia group sold out its 10.5 per cent stake at Rs. 54 per share for a consideration of Rs. 16.35 crores. That holding - consisting of 30 lakh Gesco shares - was acquired earlier at an average cost of Rs. 24 per share (for a consideration of Rs. 7.20 crores).

The obvious winner therefore is the Dalmia group that pocketed a quick Rs. 8 crore and odd. Maybe that was not how the script should have read. For most of the past four months, the group seemed intent on taking full control of the company and thereafter exploit its rich real estate. In the end it has turned out to be a transaction for swift profit and almost akin to a ``greenmail''. This term refers to an act of an investor who buys a large block of stock with the intention of selling it to a corporate raider at a premium or selling it back to the company at a higher premium to keep it out of the reach of the corporate raider. The Gesco affair comes as close as anything can in India to a greenmail.

The distinguishing aspects of the Indian capital market ought to be apparent. Unlike in the U.S. (from where all these expressions have originated) the domestic experience does not admit of a full play of market forces. One limitation is of course the short-term capital gains tax, which obviously will have to be factored in by anybody trading in shares. More serious is the non-availability of finance for take-overs from the mainline financial system.

In the Gesco episode the Sheth-Mahindra combine was reportedly sanctioned a line of credit by no less than HDFC to bolster their defence. That was unusual and led the Dalmias to petition for a similar facility. For good or for bad the Indian system will evolve over the years to structure take-over deals and more importantly to finance them. Right now most of the help merchant bankers and others give to either party in a take-over battle is advisory in nature.

The SEBI's take-over code is still evolving and will surely draw upon the two recent hostile bids, including this one. The Bajoria-Bombay Dyeing episode is the other.

Among the many yardsticks that will apply the most relevant is to look at the way the small investors of the target company have fared. Almost all of Gesco shareholders who sold to the AH Dalmia group initially at prices around Rs. 24 are the losers. Those shareholders who have stayed on can now exit at more than double the price under the open offer.

The price at which the AH Dalmia group sold out (Rs. 54) will be the benchmark. It is difficult, however, to blame the regulator for the ``loss'' suffered by the small shareholders. Maybe when hostile bids and take-overs become more common even ordinary investors can ``read'' the market correctly and realise more for their shares.

Ironically the Seth-Mahindra combine which prevented the take- over hardly qualifies for a winner status. The original promoters (Sheths) were simply unwilling or unable to unlock the value of the company. It needed a sharp jolt to wake them up. Now that they have a huge debt obligation as well - the money used to pay off AH Dalmia is not a small amount - their promise to maximise shareholder value now ought to be closely watched.

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