Special Situation in APW President Systems

APW President Systems informed the exchanges on 7 January that Schneider Electric has acquired 55% shareholding in APW President Systems from promoters at a share price of INR 195. SEBI rules require an open offer of 20% to the minority shareholders. The announcement of the offer has been done and the specified date is February 4, 2011. Dates of opening and closing the offer are 2 March 2011 and 21 March 2011 respectively. The share price is currently hovering around INR 182. Let's analyze the payout of this special situation.

The promoters hold 71.3% (4312501) shares in the company while the general public holds 28.7% (1735499) shares. The open offer is for 1209600 shares, i.e. the acceptance ratio will be 69.7%. If an investor buys 100 shares of APW President Systems at INR 182 today, the total investment would be INR 18,200. If 70 shares get accepted in open offer at INR 195, he gets 13,650 back.

There are four possible outcomes to the remaining shares of the investor:

• Schneider Electric buys the rest of the shares at the same or higher price to delist the company. If we assume the same price, investor gets INR 1300 gain in a span of around 3 months time, i.e. 7.14% returns on his investment. This is pretty good.
• Not everybody subscribes to the offer and  the acceptance ratio shoots up to 100%. The payout is similar to the one above, i.e. 7.14%.
• The shares trade at INR 160 in open market after the open offer. The investor gains INR 250 in a span of around 3 months time, i.e. 1.37%, a meager amount.
• The shares fall below INR 150 and trades at the price it was trading before the announcement, say INR 120, and the investor makes losses of around INR 950, i.e. 5.22% in a span of three months.

If we assign equal probability to each of the events, the possible gain is (0.25*0.0714+0.25*0.0714+0.25*0.0137+0.25*(-0.0522))=2.6% in three months, i.e. 10.43% compounded annually. I keep a minimum return of 20% annually and so INR 182 is not the right price to enter.

The payout in simple terms becomes

0.25*[(195-x)+(195-x)+(184.5-x)+(172.5-x)]/x=0.25*(747-4x)/x

The possible payout at different prices is mentioned in the following table:

Price	Probable Payout in 3 Months
182	2.6%
175	6.7%
170	9.85%
160	16.71%

Remember this is a probable payout. If any of the first two outcomes happen, payout at INR 182 is 7.14% in three months which is not bad. But I would consider price below INR 175 to be very attractive. The company has done well over the last six years and the average EPS over that time is INR 11.54. The book value of the company is INR 84. The company's performance has degraded since the last two quarters, which might be one of the reasons promoters want to sell out. I do not see the probability of share price falling below INR 120 after the offer but still it cannot be ruled out.