Public M&A has been a busy space in India. Interest in listed acquisitions has been aided by regulatory relaxations to minimum pricing thresholds and ability to complete control deals through stock exchange mechanisms (which award certain tax benefits, and were earlier subject to limitations). A temporary increase in the creeping acquisition limit (from 5% to 10% in a financial year) also incentivizes existing promoters to infuse fresh capital and consolidate holdings. Yet, perhaps the most active segment has been take private transactions.
Current market volatility, coupled with historic muted valuations, has provided an apt environment to launch take private deals. Recent notable launches include Vedanta, Hexaware, Adani, Allcargo and INEOS. In this piece, we endeavour to provide a brief overview of certain key aspects governing take private deals in India:
- Trigger: An acquirer may propose to take private an Indian listed company (Target) at any time (subject to certain qualifying conditions) by formally submitting its proposal to the board of directors of the Target.
- Approvals: Any take private proposal is required to be approved by the board of directors and shareholders (by 3/4th majority, and public votes in favor of the proposal being at least twice the votes against it) of the Target.
- Floor Price: Take private deals are subject to a minimum (but not a maximum) acquisition price. The floor price is determined based on various parameters, including amongst others, the historic volume weighted average market price of the Target.
- Take Private Price: The acquisition price in take private transactions is determined through the reserve book building process (RBB). To elaborate: the final price is based on the value at which equity shares tendered by public shareholders (at any value, above the floor price) during the RBB, takes the shareholding of the acquirer (along with persons acting in concert) to at least 90% of the Target’s share capital. Refer illustration A.
- Success Threshold: The take private transaction would be considered a success only if: (i) the quantum of shares tendered by public shareholders together with shares already held by the acquirer and persons acting in concert breaches the 90% threshold, and (ii) the take private price determined as per the RBB is acceptable to the acquirer. However, if the 90% threshold is not achieved or the take private price is not acceptable to the acquirer (typically on account of a high premium), the take private transaction would be considered unsuccessful.
- Counter Offer: If the 90% threshold is achieved in the RBB, but the acquirer opts not to accept the take private price – then, the acquirer has the option to make a counter offer at any price below the take private price but above the book value of the Target’s shares. The counter offer would be considered successful if the quantum of shares tendered by public shareholders in acceptance of the counter offer together with shares already held by the acquirer and persons acting in concert breaches the 90% threshold. The counter offer option was recently introduced and currently remains untested.
- Escrow Funding: An acquirer is required to deposit 100% of the estimated consideration at the floor price in an escrow account (cash, bank guarantee, or a combination of both). If the offer is successful, the acquirer would be required to cash fund its acquisition of eligible shares tendered in the RBB.
- Exit Period: In case of a successful transaction, the acquirer is obliged to purchase shares from the remaining public shareholders (ie shareholders who opted not to participate in the RBB, or whose bids were above the take private price) for a period of one year at the take private price. The consideration for such acquisition is also required to be placed in escrow for the duration of the exit period.
Take private transactions have had a checkered history in India. Though several have been successfully completed, a number of deals have failed on account of unreasonably high premiums demanded by public shareholders during the RBB process. For such cases, a counter offer may well prove to be a potential game changer as it allows a coveted second bite at the cherry.
Guest Author
Abhishek Dadoo is a Partner in the Public M&A Practice Group in the Mumbai office. He routinely advises financial and strategic investors on listed company transactions, and has been involved in friendly as well as hostile acquisitions in the listed space. He actively contributes on topics relating to Public M&A, Takeover and Insider Trading Regulations, including engagement with regulators.
Guest Author
Shashank Patil is a Principal Associate in the Corporate M&A Practice Group in the Mumbai office
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