Bayer CropScience’s share has jumped by 9.4% to Rs 1749 since it announced a week ago, that it is planning a share buyback. Today, its board said it has approved the proposal. But minority shareholders are likely to get a jolt, as the buyback will be through the tender route instead of a buyback routed through the stock market. And, what could be more upsetting is that the price has been fixed at Rs 1,580, a discount of 9.7% to the current price.
The mode and price are both likely to see its share decline tomorrow when trading opens, as investors may take a dim view of the price and the mode. Today’s announcement came post-market hours.
Why are shareholders likely to be disappointed? A tender buyback means a fixed price offer and if it is lower than the current market price, it will be seen negatively, especially by those who jumped on the bandwagon very late. Also, a tender buyback means that capital gains tax will be applied at normal rates, for both short term and long term holders.
Under a market buyback, shares that are tendered are through the market mechanism and Securities Transaction Tax is levied. As a result, a concessional capital gains tax regime becomes applicable. Long term capital gains tax is nil and short term capital gains are taxed at 15%.
In a tender buyback, long term capital gains will be taxed at 20% with the benefit of indexation (based on inflation) while short term capital gains is added to income and taxed normally. The tax rate applicable to the person will be applied on these capital gains too, which is 30% at the highest slab. Therefore, the returns to shareholders in a tender offer on a post-tax basis are typically lower than that in a market offer.
So why did Bayer CropScience resort to a tender offer? The backdrop to Bayer CropScience’s offer—to return surplus cash on account of a land sale—can be found in this previous article on Indiabusinessview.com. As it mentions, the buyback amount would have been constrained by the fact that Bayer CropScience’s promoter already held a 71.1% stake in the company. In a market buyback, the buyback size would have been capped at Rs 280 crore. In the tender buyback, Bayer CropScience can give back Rs 455 crore of the Rs 970 crore in cash that it had on its books, as of March 31 2013.
Second, Bayer CropScience’s promoter would not have been able to participate in the market-linked buyback as Sebi’s rules do not permit promoters to offer shares in a market buyback. In a tender offer, promoters too can participate. Bayer CropScience has informed the exchange that the promoters intend to participate in the offer. Thus, the company will be able to utilise a larger portion of its surplus cash for the buyback and the promoter will get back some cash from its subsidiary as well.
If the market price goes below Rs 1580 in a swift decline, then shareholders who have been holding its shares for a long time (the share has more than doubled in a year’s time) may consider offering their shares in the tender offer, if their post-tax returns are higher than if they sell in the market.
If very few minority shareholders tender their shares, and the promoter is the main tenderer, then the offer will not be a complete success as the company can buy back only as many shares as will take the promoter stake up to 75%. That translates to 15.4lakh shares that can be bought from the promoter, or 53.4% of the total shares that are being contemplated to be bought back. Thus, Bayer may still be unable to use up all the Rs 455 crore that it wants to distribute to shareholders, but the promoter may be happy at having got back some cash from its subsidiary.
Updated: Headline changed to reflect the correct buyback amount of Rs 455 crore instead of Rs 483 crore mentioned earlier.