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SUN TV is going to meet for a buyback offer, probably soon. But there is a fundamental problem in a buyback: The promoter, Kalanidhi Maran, already owns 75% in the company, the max promoter holding allowed by SEBI. (From SunTV on Snap)
The stock is at Rs. 400, so the market cap is Rs. 16,000 cr.
In India, a company isn’t allowed to take debt in order to buy back shares, and while Sun TV is debt free, they can’t get cash to do the buyback. The cash on the books, according to the company’s press release, is Rs. 735 cr. and they have an additional 867 cr. in receivables. There’s Rs. 162 cr. in current investments (mostly mutual funds) which seems to have fallen in the last six months.
At this rate, with the cash available, Sun TV promoters will probably have between Rs. 800 to Rs. 1000 cr. of cash. Even if they used all of it, they would be able to buy a maximum of 6% of the stock.
In order for the price to be attractive, they will have to offer a price of Rs. 440 or more, in our opinion.
There are two kinds of buybacks: Market and Tender. (See our Demystifying Buybacks piece at CM) In a market buyback, the company appoints an investment banker who buys the stock using the company’s money, upto a predefined upper price limit and total amount spent. Now SEBI will not allow promoters to sell in this window, because if the company’s buying and the promoter is selling, it could be timed so that it’s insider traded.
But promoters can sell in a tender buyback, where the company offers all shareholders the same price, and everyone can tender in their shares. The offer is then proportionate to the shares tendered.
Since the promoters cannot have their shareholding go to more than 75%, a market buyback makes no sense. Since promoters can’t sell, anyone else selling will means the total outstanding shares come down, and the promoter shareholding will therefore go up and above the 75% barrier.
A tender buyback is then the only way out – which will mean all investors will come in at the same price.
Sun TV has a lot of things going against it. Politically they are now friends with the opposition party, and looking at the way they were eased out of Spicejet, the future doesn’t look good for them in the near term. With Rs. 800 cr. in cash inside SunTV, the promoters could feel that the government might target them and freeze their money. In fact, just recently, the ED froze assets worth Rs. 280 cr. and this was only freed after a court ordered a stay. It’s obviously not the end.
While promoters can pay a dividend, that will lose 20% to the government (as dividend tax).
A tender offer is also taxed – the profit earned is taxed at 10% as long term capital gains, since the shares are repurchased by a company but not on a stock exchanged. The tax however has a lower impact than dividend tax and is likely to be used.
It might also be protection against any potential bad news that might trigger a huge drop in the stock. In fact, the reason promoters aren’t selling directly in the market is probably that itself – that it would cause a massive drop in the stock price.
SunTV’s chart is bullish. Reaching Rs. 460 might be a target, and if the buyback price is around that level (if it actually happens) it may provide a good reason to exit the stock. Fundamentally it’s done well, but the political ramifications and the impact of more scrutiny could take the company to it’s knees.
In these times, stocks move on rumour and sell out on the news. So be warned that a buyback, while providing room for the stock to move up a little, will probably see very different market reactions that we can currently fathom.
Thanks to Sunil Arora and Jagandeep Singh for the inputs on our Slack channel!
Disclosure: No positions. (Analyst, Analyst’s Family, Company)
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