Reliance Industries, one of India's largest private sector enterprise has announced its intention to make an open offer to the shareholders of BSES Ltd., one of India's largest power generation and retail distribution company, under the Securities Exchange Board of India (SEBI) takeover code. Reliance already holds around 15% in BSES Ltd.
The open offer will be made for 20% of the subscribed and fully paid up equity capital of BSES (approximately 27.55 m shares) at a price of Rs 234 per share, aggregating around Rs 6.5 bn. The acquisition will be made from Reliance internal resources. The BSES stock closed at Rs 255 today. The offer price (Rs 234 per share) represents the minimum 26-week average price specified under the SEBI regulations. The offer is slated to open in June 2000 for a period of 30 days.
Reliance's bid, if it goes through, will give its power sector ambitions a big boost. The company has already stated that it wishes to setup capacity of over 10,000 MW within a decade. BSES's experience in operating power plants and selling it to retail customers will benefit Reliance. Furthermore, Reliance's Internet plans would benefit from BSES's recent foray into this sector (it is already in the process of laying its fibre optic cable network).
BSES on the other hand stands to benefit from the financial strength of the Reliance group. This would help in cutting down its debt burden, which at the end of FY99 stood at Rs 9.2 bn. Lower interest costs (Rs 1.1 bn in FY99) would then boost profit margins. Furthermore, BSES could benefit from the deal making abilities of the Reliance Group.
The takeover seems to be in the best interest of both the companies. However, what is interesting to note is that the offer price is lower than the current market price. Therefore it is unlikely that retail shareholders will opt for this offer. Institutional shareholders may however choose to exit, as they are unable to liquidate their large holdings in the market without adversely affecting the stock price.
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