Harita Seating has recently announced its merger with Minda Industries. The merger comes at a low point for Harita seating in terms of slowing fundamentals. Even the stock price of Harita had tumbled down by 60% from its peak of Rs 1,100 at the start of last calendar year. Minda Industries took this as an opportunity and acquired controlling stake in Harita seating.
Harita Seating is primarily involved in supplying seats in automotive segment. Minda industries on other hand supplies horns, switches, lighting equipment’s, switches, canisters, seat belts etc. Minda wanted to add more products per vehicle, in line with that it has gone ahead and sealed the deal with Harita seating.
Harita seating is owned by TVS group, which hold 52% of controlling stake. Foreign portfolios own another 14% and the rest is owned by public shareholders. Harita seating has a JV with Fehrer(Germany) for developing new technologies and products in seating space. Harita has a 51% stake in Harita-Fehrer JV, which post merger will be controlled by Minda Industries.
Merger Creating a significant Value addition to Minda?
The merger of Minda industries and Harita seatings is unlikely to create a significant value addition to Minda in terms of any financial metrics. The below table says it all. Most of the financial parameters remains same. the size of Harita seating is comparatively very small for Minda industries (Harita is less than 5% of Minda’s market cap).
The only advantage for Minda industries is that it will get a foothold in the CV space, where its presence was almost zero. Harita’s sales are in Commercial Vehicles: buses, tractors and some in the 2 wheelers segment. Minda industries major presence has been in four-wheeler segment followed by two wheelers. With Harita, it gets access to all the CV clientele for which it can pitch its other products.
Furthermore it can use Harita seatings expertise in seatings to pitch for four wheeler segments, for which it already has good clientele. For Minda the cost of acquisition is relatively low considering the access it is getting to a whole new business segment and with a good clientele base. The deal is believed to create significant synergies rather value addition.
The Share Swap Deal.
Management of Harita and Minda have given two options for shareholders of harita. One is a plain vanilla share swap and other is share swap with preference shares. We will analyse both the options and check if we have any arbitrage in the deal.
For every 100 shares held in Harita seats you will get 152 shares of Minda industries.
- At todays price you buy 100 shares of Harita at 447.00 for a total value of Rs 44,700.
- You will get 152 shares of Minda, post record date.
- Assume Minda industries will be trading at current price of 318 post record date.
- In all you will be holding Rs 48,336 worth of Minda shares, which you can sell for a profit of about Rs. 3,636.
- The gain will be roughly 8.13%.
- Tax rates in India for short term capital gain are at 15%. The effective capital gain works out to be 6.92% post tax.
- The risk is: If Minda industries shares falls greater than 7% post record date, then you will be on losing end.
- (No way to hedge this risk, as Minda is not in the F&O segment)
For every 1 share held in Harita seating, you will get 4 non convertible redeemable preference shares at an issue price of Rs 121.25. The preference shares will be having a yield of 7.25% on issue price.
The preference shares are for a tenor of 3 years. The preference shares have a coupon of 0.01%, which is almost like a zero payment, but the yield is likely to either be a dividend or a premium on redemption (we don’t know which).
- At todays price you buy 1 share of Harita Seating at Rs 447
- You will get four non convertible redeemable preference shares of issue price 121.25
- You will earn a yield of 7.5% on Rs 485 (4 shares of 121.25). The effective payment is Rs 36.375 on annual basis, if the payment is annual.
- This on an investment of Rs 447 works out at 8.13% yield on annual basis.
- We are not sure whether they will pay in terms of dividend or a redemption premium. We think its most preferably dividend as the its already mentioned coupon payment (interest) is 0.01%.
- Then effective yield will be same at 8.13% as dividends are post tax in India.
- If it’s a redemption premium, then the company will pay Rs. 151 per share after three years (effectively, 7.5% per year). This option is taxable as a capital gain or interest.
- We don’t know if the debentures will be listed, so liquidity isn’t going to be easy in the interim. (You’ll have to plan to hold for three years)
- The risk: that Minda shuts down and you can’t be repaid.
We at Capitalmind don’t have interest in either stock, but the arbitrage poses an interesting idea:
- If you want to buy Minda, it may be better to buy Harita instead, because you get it at an effective discount of around 8% when it’s converted
- If you are confident of Minda’s prospects, then the second option – taking preference shares instead – may be a good post tax yield at 7.5% to 8%.
- The arbitrage, however, will only be evident once final documents are filed – the fine print may change a lot of details mentioned above.
We don’t have a view on either, or a stock opinion either. What we do know is that the deal values Harita just about where it stands today in the market (no major premium). It doesn’t seem to change Minda’s financials by very much.
The only arb can be in the preference shares, if you’re interested in a more risky fixed income instrument. In the days when you have a failing Anil Ambani and a struggling Subhash “Zee” Chandra creating ripples in the fixed income space, we might just be more fortunate with this arbitrage on Minda instead.