For a better part of the first 5 months of 2021, PNB Housing
stock almost did nothing. A stock in the range of Rs370-390 for five months is hardly going to attract too much attention. Things change drastically starting the end of May-21. In a span of 9 trading sessions, PNB Housing stock more than doubled from Rs404 to Rs881. Despite the subsequent correction, it is still 75% above the May-end price level.
The turnaround happened after the board of PNB Housing approved the preferential issue of shares and warrants to PE investor Carlyle and others worth Rs3,185cr. However, there were 3 interesting things about this deal. Post the preferential issue, Carlyle Group becomes the majority shareholder of PNB Housing with over 50% stake in the company.
Secondly, one of the issues that became the bone of contention was why the company opted for preferential issue when a rights issue would have been fair to minority shareholders. We will come back to this point later. Lastly, one of the investors in the preferential issue is Salisbury Investments floated by former HDFC Bank CEO, Aditya Puri. Interestingly, Carlyle had appointed Puri as its advisor for Asia in November 2020, just 2 months after he retired from HDFC Bank.
Quick round of facts about the preferential allotment
The board of PNB Housing approved the preferential allotment of shares and warrants to Carlyle Group and other entities. The deal would make Carlyle Group the controlling shareholder of PNB Housing with over 50% shareholding. Carlyle and Salisbury Investment as (PAC) have already initiated open offer to public shareholders to acquire an additional 26% of PNB Housing as per SEBI regulations. Once this preferential allotment is completed, Punjab National Bank will become a minority shareholder with just about 20% stake.
Unlike a typical rights issue, the preferential offer is not a long drawn process in terms of filings and formalities. Also, the rights issue would be annulled in case 90% response is not received and that risk can be overcome in a preferential issue since it is a back-to-back advance commitment. However, the preferential issue has to be passed by 75% majority vote. For PNB Housing, which has had a couple of rating warnings and needs to raise capital urgently, the preferential offer was the surest and quickest route to raise funds.
Proxy advisor objections to the deal
This is perhaps the most important aspect of the entire debate surrounding the open offer. Proxy firm, SES, has called this preferential offer ultra vires the interests of minority shareholders. The objection of the proxy firm are centred on two points.
a) The first objection pertains to the modus operandi of fund raising. For example, SES is of the view that a rights issue with an equal offering to minority shareholders would have been fair rather than a preferential offer. However, that is an extremely theoretical argument because the big priority is to infuse funds into the company and its parent, PNB, has been looking to monetize and reduce its stake to the extent possible. From that perspective, the preferential offer was a more reliable funding source for PNB Housing.
b) The second objection pertains to the pricing of the preferential offer. On paper, the minimum offer price for the preferential offer as per the SEBI formula comes to Rs384 per share. The preferential offer price at Rs390 meets that criterion. But SES has raised objections on 3 counts. Firstly, most PSU stocks are trading at discounted valuations and a preferential offer at historic price was not fair to minority shareholders. Secondly, SES has contended that doing a preferential offer at Rs390 when the book value per share was Rs530, was prima facie against standard practices. Lastly, SES opined that Carlyle was not paying control premium despite getting a controlling stake in PNB Housing.
Sweeten the offer for the sake of control premium
To cut a long story short, this entire debate is about control premium. In a way, the recent moves would impel the buyer (in this case Carlyle) to sweeten the preferential issue so that the approvals go through smoothly. Carlyle and PAC would not overly worry about a control premium because they are getting control of an up and running home loan franchise. Obviously, this would include the ability to leverage the PNB network, which becomes an intangible value driver not pegged in the price.
Sweetening the offer would hit multiple birds with one stone. It would be fair to small shareholders for being denied the rights route. Secondly, where there is control, there has to be control premium, especially, when the agreed price is 25% below the book value of the company. Lastly, the effective dilution would be much lower post sweetening, since the stock is trading at a hefty 75% premium to the preferential allotment price. A reasonably sweetened price should address all these issues and, perhaps, put this controversy to rest.