Capturing VST's charms: the final battle for control?

By C. R. L. Narasimhan

The hostile bid for the Hyderabad-based VST Industries's shares mounted by Brightstar Investment Holdings has reached a decisive stage. Over the last week-end Brightstar Investments dramatically hiked its offer price to Rs. 151 per share and simultaneously announced that it would target 30 per cent of VST's equity up from the 20 per cent originally intended. Brightstar is controlled by the broking firm R. G. Damani and if it succeeds entirely in its latest bid it will end up controlling nearly 46 per cent of VST's equity. Brightstar had started this hostile bid by making market purchases of the equity, which now approximates almost 16 per cent.

Other factors too suggest that the bidding war might be reaching a finale in one sense, while leaving big question marks over VST's future. VST Industries has had the support of ITC in this bidding match. ITC's close connection internationally with British American Tobacco (BAT) lends a further edge to the goings on. ITC's subsidiary Russell Credit has been marginally bettering Brightstar's (Rs. 115 as against Rs. 112 in the first round) but its latest offering to VST's shareholders made last week was at Rs. 125 per share (up from Rs. 120 earlier). It has fallen short of what Brightstar could finally offer. The predator's bid at Rs. 151 is a good Rs. 26 above Russell Credit's offer. Russell Credit has publicly announced that it will opt out of the bidding war and in any case does not have further opportunity under the Securities and Exchange Board of India (SEBI) rules to improve its bid. (There is a timeframe within which the bids and counter- bids, if any, should cease). Earlier, VST had recommended that their shareholders take up the ITC subsidiary's offer as it was ``strategic" in nature.

So what next at VST, India's second largest cigarette maker, with formidable, though low-end brands such as Charms and Charminar? Like the other tobacco companies VST has been feeling the heat of the anti-tobacco measures. As its annual report records low-end cigarettes have been harshly treated by the excise duty structure. However, its financial performance last year was however impressive. It earned a net profit of Rs. 27.49 crores and paid a dividend of 25 per cent considerably more than the previous year's net profit of Rs. 15.69 crores and dividend of 10 per cent. Based on those figures the EPS works out to Rs. 17.80 and the PE ratio (based on the latest bid of Rs. 151) is 8.49.

Two developments will be watched with interest. The financial institutions hold an 18 per cent stake in VST's equity, the other major shareholders being BAT 32 per cent, Andhra Pradesh Government 4.7 per cent, public 29.3 per cent and Brightstar 16 per cent. There are reports that the institutions will cash in on the high price Brightstar is offering. Many retail investors will certainly follow suit. Hence the shareholding pattern is in for an overhaul.

Which leads to speculation over what the broker-owned Brightstar will do with its potential acquisition. Green mail was believed to be a motive when the hostile bid was first mounted, but that seems less certain now. Analysts however say that at its latest offer price of Rs. 151 Brightstar is paying much above what is warranted in terms of VST's financials and near term prospects.

The advisors to the hostile bid claim that there is no move to destabilise the current management but only to ensure that they give a better deal to the shareholders. But all that one can say with certainty is that VST was undervalued in the first instance and even as its quotations have been driven up through competitive bids, it is still attractive. VST sits over huge cash balance, Rs. 69 crores in cash and bank balance alone.

Apart from the more conventional reasons as to why anyone should covet the company, there is now an interesting twist. Are Brightstar and the Damani's fronting for an undisclosed company in India? Even more intriguingly it is for an international tobacco giant such as Philip Morris or less probably BAT itself?

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Section  : Business
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