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Opening up to firm trends

Suresh Krishnamurthy

CASTROL India, Thomas Cook, Foseco India and Rhone Poulenc have all been attracting intense trading interest over the past fortnight. A common ingredient in all the four stocks is the open offer. BP Amoco has come out with an open offer for Castrol India while the acquirer of its stake in Foseco India would eventually make the open offer for that company.

In the case of Thomas Cook, the business of the overseas parent has been split more or less on the lines of what happened to Burmah Castrol, which led to the open offers for Castrol India and could lead to the open offer for Foseco India. This has fuelle d expectations of an open offer, leading to the firm price trends.

In the case of Rhone Poulenc, the overseas parent, Aventis, is looking for a buyer for its stake in Rhone Poulenc. Reports have also emerged that several Indian healthcare companies are in the race to buy the company. In this case too, an open offer is a certainty in the event of a stake transfer.

A similar trend is visible in the case of public-sector disinvestment candidates. Companies such as Hindustan Zinc, IBP and Shipping Corporation are all in demand since any disinvestment through the strategic sale route would lead to an open offer.

These cases follow a long list of stocks in which such open offers led to a sharp appreciation in value. Stocks of Indian affiliates of multinationals such as Philips India, Punjab Anand Lamp Industries, Coates India, Knoll Pharma and in the case of a fe w Indian companies such as American Remedies, Raasi Cements, Shri Digvijay, Narmada Cements, open offers have delivered value especially compared to the prevailing market price.

However, it is also necessary to keep in mind that this situation need not obtain in every single event. For example, in the case of International Bestfoods, the open offer price was barely higher than the prevailing market price. It is also not necessar y that such expectations of an open offer should translate into an open offer. A case in point is Bausch & Lomb India.

What these issues indicate is that at the end of the day, a run up in prices on the back of expectations of an open offer is only speculation in a different form.

For example, in the case of Wartsila India, the company has stoutly denied rumours that a change in control is in the offing and any premature run up in price is likely to be aborted. Given this backdrop, investors would do well to stay away from such sp eculation-driven investments since the risks appear high. On the other hand, existing investors can utilise such price trends to pare down their exposures in the stock.