CHI Investments – proposed merger impact

Dear Friends,

RPG group has proposed the merger of the listed finance cos viz. CHI Investments, Summit Sec, Octave Investments, Brabourne Ent with RPG Itochu Finance. As per the preliminary analysis, I feel the scheme and ratios are unjust to the shareholders of CHI Investments.

There are two issues in this amalgamation:

1) RPG Itochu Finance Ltd shouldn’t be a blank company i.e. it should offer value equivalent to the value being offered by the merging companies. Explanation: We have been informed that RPG Itochu is having equity of close to Rs. 5 Cr without having any significant operations, assets or profitability on balance sheet. If so, it will reduce the current value of the merging companies by 50+%.

2) The swap ratios seem unjust:

The logic in all these four cos is: They are just holding cos, so the best way to value them is – consider the market value of investments they have and consider the exchange ratio accordingly, while RPG is trying to give benefit to Summit Securities which has the least value (refer column F below) among all the four listed companies.

Here is the calculation sheet:

Merger Impact (as on 13th July)

Equity

CMP

Current Mcap of Company

MV of Invest.

Ratio (MV of Invst/Mcap of Co.)

1 Share of RPG Itochu for

New Equity creation in RPG Itochu

Cost to shareholder in new co.

A

B

D

E

F = (E/D)

G

(A/G)

H = B*G

Summit

48.51

8.4

40.75

165

4.05

16

3.03

134

Brabourne

14.39

7.75

11.15

58.04

5.20

28

0.51

217

CHI Investments

11.46

28

32.09

258.80

8.07

6

1.91

168

Octav Investments

3.01

20

6.02

26.11

4.34

21

0.14

420

507.95

5.60

MValue of Investments per share in new company (436.93/5.60)

907.19

RPG group is trying to give more value to Summit Securities where the ratio of MV of investments to MCap of the company itself (i.e.. column F) is the lowest. i.e.. 4.05 times vs 8.07 of CHI Investments. So the company having the least value has been offered the best swap ratio (refer column H) and other companies i.e.. CHI Investments and Octave are being penalized L

The approximate damage to the shareholders of CHI is:

Damage to shareholders of CHI Investments
Earlier After Merger
M Value of Investments per share

225.83

907.19

Cost to shareholder

28.00

(CMP)

168.00

(As per merger ratio of 1:6)
Ratio (of Value of Investments per share)

8.07

5.40

Damage:

33.05%

This is a clear case of unjust value erosion to the shareholders of CHI Investments. We should take the matter to the company and SEBI etc.

If the management’s intention is to just consolidate the cos into one company, why merge these into RPG Itochu?? Why not merge the other 3 companies into CHI Investments which itself is listed on both BSE & NSE.

At the bare minimum, they should revise the swap ratio for shareholders of Summit Securities to 1:56 from 1:16 (Logic: CHI holds value 8.07 times while Summit has value of only 2.31 times so swap ratio for Summit should be 2 times more than current ratio). Ideal swap ratio for Summit Securities should be 1:40, if swap ratio for CHI is 1:06, to bring the shareholders to the same level.

Management should provide details on RPG Itochu and the rationale for these swap ratios.

If the swap ratio gets corrected it will result into value-unlocking for CHI Investments.

Assumptions:

  1. All calculations have been done considering RPG Itochu finance to be a new company created for the purpose of merger or having a very small equity capital.
  2. I haven’t considered the value of unlisted investments in the above companies (they are less than 10% of the total investments).
  3. Haven’t considered the impact of merger of Instant Holdings with KEC, which is a subsidiary of Brabourne Enterprises.

P.S. There were few updates on the Value of investments in the companies the effect of which has been updated on 26th July 09.

UPDATE: The most important question in this amalgamation scheme is – What does RPG Itochu Finance Ltd has to offer ?

As per recent updates, it has been known that RPG Itochu Finance Ltd is having an equity of close to 5 crores with no significant operations. If so, then this merger will reduce the value of merging companies by 50+%. The effect of the same is not reflected in the tables above.

51 thoughts on “CHI Investments – proposed merger impact”

  1. Update: The most of pertinent question is – What does RPG Itochu has to offer to the merging cos?

    As per the initial digging, RPG Itochu has an equity capital of close to 5 Cr with no significant operations. assets or profitability. If so it will be 50+% erosion in the value of merging companies.

  2. Update: The most of pertinent question is – What does RPG Itochu has to offer to the merging cos?

    As per the initial digging, RPG Itochu has an equity capital of close to 5 Cr with no significant operations. assets or profitability. If so it will be 50+% erosion in the value of merging companies.

  3. Yes, Mr. Parghi, we should get together and protest. I’m trying to gather facts and if the above calculations are right, I’ll make complain to the Company and SEBI.

  4. Yes, Mr. Parghi, we should get together and protest. I’m trying to gather facts and if the above calculations are right, I’ll make complain to the Company and SEBI.

  5. Hi Ayush,

    1. File a complaint in SEBI immidiately. try to get it to the Directors for immidiate review. Depending on the time availalble, please have as many people send complaints.

    2. File for stay immidiately in the High court where scheme of arrangment is applied for. Get a decent lawyer.

    3. Make a association / forum of shareholders. Ask people to pool in money.

    4. Make an effort to bring this out in various publications/media . Try to apprach CNBC etc.

    5. Make complaints to ROC / NSE/ BSE etc. and any other regulator u feel appropriate.

    Most importantly, time is of essence. Act swiftly.

    Hope this helps and you succeed. All the best
    alok

  6. Hi Ayush,

    1. File a complaint in SEBI immidiately. try to get it to the Directors for immidiate review. Depending on the time availalble, please have as many people send complaints.

    2. File for stay immidiately in the High court where scheme of arrangment is applied for. Get a decent lawyer.

    3. Make a association / forum of shareholders. Ask people to pool in money.

    4. Make an effort to bring this out in various publications/media . Try to apprach CNBC etc.

    5. Make complaints to ROC / NSE/ BSE etc. and any other regulator u feel appropriate.

    Most importantly, time is of essence. Act swiftly.

    Hope this helps and you succeed. All the best
    alok

  7. On 13th July 09, all four companies viz. CHI, SUMMIT, OCTAV and BRABOURNE Board of Directors have approved the amalgamation of their companies into another NEW company viz. RPG – ITOCHU Finance Ltd. at the prescribed ratio for exchange of the current shares into a new share.

    The SWAP RATIO as approved by all 4 companies are as under:

    One NEW Equity Shares of RPG ITOCHU Finance Ltd. shall be issed for every :

    (a) 6 Equity Shares of CHI Investments Ltd. (CMP Rs. 64.25)
    (b) 16 Equity Shares of SUMMIT Securities (CMP Rs. 14.40)
    (c) 21Equity Shares of Octav Investments (CMP Rs. 24.95)
    (d) 28 Equity Shares of Brabourne Enterprises ( CMP Rs. 10.80)

    Further the amalgamation is to take effect from the appointed date which is 31st March 2009 and hence all the proceedings are to likely to be completed very shortly.

    The SWAP ratio is determined by the independent valuers M/s Grand Thorton and the fairness report provided by M/s Keynote Corporate Services which is further approved by the Board of Directors of all 4 companies. It seems that the VALUER has considered the holdings unlisted companies by each such companies.

    Based on the above report it is beneficial to : (1) SELL CHI Investment and simultaneously BUY SUMMIT Securities OR (2) SELL OCTAV Investments & BUY SUMMIT Securities OR (3) SELL BRABOURNE Enterprises and BUY SUMMIT Securities.

    As the SWAP ratio is FIXED and all the formalities are likely to be completed very shortly, the same will also be reflected into strengthening of Share Price of SUMMIT Securities in a very near future.

  8. On 13th July 09, all four companies viz. CHI, SUMMIT, OCTAV and BRABOURNE Board of Directors have approved the amalgamation of their companies into another NEW company viz. RPG – ITOCHU Finance Ltd. at the prescribed ratio for exchange of the current shares into a new share.

    The SWAP RATIO as approved by all 4 companies are as under:

    One NEW Equity Shares of RPG ITOCHU Finance Ltd. shall be issed for every :

    (a) 6 Equity Shares of CHI Investments Ltd. (CMP Rs. 64.25)
    (b) 16 Equity Shares of SUMMIT Securities (CMP Rs. 14.40)
    (c) 21Equity Shares of Octav Investments (CMP Rs. 24.95)
    (d) 28 Equity Shares of Brabourne Enterprises ( CMP Rs. 10.80)

    Further the amalgamation is to take effect from the appointed date which is 31st March 2009 and hence all the proceedings are to likely to be completed very shortly.

    The SWAP ratio is determined by the independent valuers M/s Grand Thorton and the fairness report provided by M/s Keynote Corporate Services which is further approved by the Board of Directors of all 4 companies. It seems that the VALUER has considered the holdings unlisted companies by each such companies.

    Based on the above report it is beneficial to : (1) SELL CHI Investment and simultaneously BUY SUMMIT Securities OR (2) SELL OCTAV Investments & BUY SUMMIT Securities OR (3) SELL BRABOURNE Enterprises and BUY SUMMIT Securities.

    As the SWAP ratio is FIXED and all the formalities are likely to be completed very shortly, the same will also be reflected into strengthening of Share Price of SUMMIT Securities in a very near future.

  9. I have shares of CHI [since the ceat split ] @ 225/share .Now another one comes ,what is going to happen to my money ,it seems that it is going to vanish.Do you have any idea at what price this RIFL is or is it a listed company or not .Pls advise what shd i do now. Thanks

  10. I have shares of CHI [since the ceat split ] @ 225/share .Now another one comes ,what is going to happen to my money ,it seems that it is going to vanish.Do you have any idea at what price this RIFL is or is it a listed company or not .Pls advise what shd i do now. Thanks

  11. Dear Rajni,

    As per the merger announcement, every 6 shares of CHI will be swapped into 1 share of RPG Itochu finance.

    RPG Itochu is an unlisted company as of now, but the same should get listed in a couple of months.

    The listing price should be +/-10% of Rs 265.

    Regards,

  12. Dear Rajni,

    As per the merger announcement, every 6 shares of CHI will be swapped into 1 share of RPG Itochu finance.

    RPG Itochu is an unlisted company as of now, but the same should get listed in a couple of months.

    The listing price should be +/-10% of Rs 265.

    Regards,

  13. Dear Akhilesh,

    You will be getting 1 share of RPG Itochu finance against your 21 shares of Octav Investments.

    We had advised timely exit to all our clients earlier…one should had taken exit after understanding the negatives of this proposed merger as discussed at our blog.

    Anyways, on the listing day of RPG Itochu, you may get a good exit price.

    Regards,

  14. Dear Akhilesh,

    You will be getting 1 share of RPG Itochu finance against your 21 shares of Octav Investments.

    We had advised timely exit to all our clients earlier…one should had taken exit after understanding the negatives of this proposed merger as discussed at our blog.

    Anyways, on the listing day of RPG Itochu, you may get a good exit price.

    Regards,

  15. what is the expected listing price ogf RPGitochu, I have brought CHI @ Rs 60+ can Iget a chance to exit
    MohananK

  16. what is the expected listing price ogf RPGitochu, I have brought CHI @ Rs 60+ can Iget a chance to exit
    MohananK

  17. I am holding shares of Octav Investments, when can I expect equity shares of RPG. I hope my money is not totally lost..please advise how would I learn about it…and how would i get the shares.

  18. I am holding shares of Octav Investments, when can I expect equity shares of RPG. I hope my money is not totally lost..please advise how would I learn about it…and how would i get the shares.

  19. Hi,
    I am having 400 shares of Summit securities. Do you have any idea of wat will happen to my holdings. Can you give me an approximate date of RPG Listing in the exchange

  20. Hi,
    I am having 400 shares of Summit securities. Do you have any idea of wat will happen to my holdings. Can you give me an approximate date of RPG Listing in the exchange

  21. Vijay,

    Please go through the comments and details above. All answers to your questions have already been answered.

    Regards,

  22. No concrete information but the listing should happen in a month.

    Recently there was a notice by BSE that they have received the listing documents.

  23. Interestingly Ms Sucheta Dalal has wrote an article in her magazine, one may read through

    http://moneylife.in/article/8/5328.html

    Though majority of us should have received shares but knowledge to the masses is a must….

    Hats off to Ms. Sucheta again who always stood by a genuine cause and a vocal supporter of pained minority shareholders…..

  24. Hi..any updates, I am holding Octav investment shares with me.. when can i expect shares of RPG itochu as per merger.
    thanks

  25. It's June start and no updates regarding RPG itochu. I believe that management is being totally irresponsible. Is there a way, we can request action against the ITOCHU management? Wouldn't SEBI or Investor Grievance Cell help small investors?

  26. i am holding 1500 shares of summit sec.and as per ratio i will be getting 93 shares of rpg itochu finance, but when the stock will be listed.

    regards,

    nirav shah

  27. hi, I',m holding 1000 shares of Brabourne. Still i didnt get the new shares as per the merger ratio and my demat(icici) account shows brabourne;s 1000 shares. Please let me know what should i do now.

    Please help.. if could give contact details of the company will be great..

  28. After reading all comments and your reply, pls reply when RPG Itochu finance will be listed and what about invester faith shown in all this amalgamation scheme?????????

  29. Dear Amol,

    I'm also eagerly waiting for the shares to get listed. I'm also disappointed with the delays.

    As per sources, the listing has got delayed due to some technical problems. The listing may happen by August end.

    Regards,

  30. rpg itochu listing date janne ke liye ……..no he 02224930621 ye number intime spectrum RASISTAR ka he …….jb b phone karen tb SHRUTI ji se baat karen …..unke paas hi iski listing ki puri jankari milegi ………..happy investing …:)

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