Monday, November 26, 2007

Quiz for Students on LGB

---------------------------- Original Message ----------------------------
Subject: Analyze This
Date: Mon, November 26, 2007 11:13 pm

How would you analyze this?

Text Follows:

August 7, 2007

LG Balakrishnan & Bros Ltd has informed BSE that the Board of Directors of the Company at its meeting held on July 30, 2007, has intended to reduce the paidup capital of the Company by extinguishing 5,658,000 equity shares of Re 1 each held by Trustees LGB Shareholding Trust allotted to them by virtue of scheme of amalgamation as approved by the High Court of Madras, subject to the approval of the shareholders and the High Court.

And this:

Text Follows:

November 26, 2007

LG Balakrishnan & Bros Ltd has informed BSE regarding the order for confirmation by the High Court of Madras under Section 101 and 102 and other applicable provisions of the Companies Act, 1956, for the reduction of the existing fully paid up Share Capital of the Company from Rs 84,139,034 divided into 84,139,034 Equity Shares of Re 1/- each to Rs
78,481,034 divided into 78,481,034 equity shares of Re 1/- each so as to reflect the true paid up capital of the Company by cancellation of 5,658,000 equity shares of Re 1/- each amounting to Rs 5,658,000 in the Company standing in the name of Sri. B Vijayakumar, Sri. P S Balasubramanian and Sri. S Sivakumar, Trustees of LGB Shareholding Trust, which represents the own capital of the Company.


VISHNU said...

I am try to explain from my rudimentary knowledge..(Pls let me know if I PASS)

No of shares are reduced from 84,139,034 to 78,481,034 by cancellation of 5,658,000 equity shares.

This equivalent of a mother preparing same no of roti everyday. But the no of children got reduced due to (cancellation :) )..So the children now get more no of roti / child.

But why this mother got this much children in the first place is a question need to be answered. (Looks like they have not done family planning well :) )


Apurv said...

Just wage thought came in my mind..

We should also consider why they are reducing equity that too from promoters stake.

I put it in this way,

LGB is a shop and I'm having 50% partnership in the shop. Now when LGB reducing equity or partnership, why I'm willing to lower my partnership? Does that mean I expect lower return on my partnership in future?????

Peeyush said...

this should essentially mean that equity is reduced, and cash from the balance sheet is also reduced. The reasons could be higher than required cash, which the management feels will not generate higher returns from the business itself. They can use the cash either to buyback shares or increase dividends. Corporates rarely increase dividends for this reason, since they will have to maintain high dividends in future as well. Hence the logical option seems buyback. Colgate has also done something of this sort recently, wherein they did not reduce their equity, but reduced the face value per share from Rs 10 to Re 1, thereby distributing a Rs 9 special dividend. Again the reasoning seems that the company does not believe that this extra cash if pumped in the business will return higher returns than those in the past.

It is a good practice if the management' reasoning is the same as given above. A lot of the IT companies today are sitting on huge cashpiles, but neither are they doing something worthwile with it, nor are they returning it to shareholders via dividends or buybacks.

Sanjay Bakshi said...

This is an interesting transaction because its more powerful than a buyback. A regular buyback, which requires a cash payout to selling stockholders, always results in a reduction in the value of the company doing the buyback. However, the number of outstanding shares also declines. So, depending on the price at which the buyback is done, the per-share value may rise or fall.

LGB is doing something very different. One stockholder has, in effect, surrendered his shares, without taking anything back in return. This is functionally equivalent to a gift from that stockholders to all the other stockholders. In this case, the value of the company does not fall at all, and since the number of shares outstanding have declined, the per-share value has increased.

The quantum of the surrender is not insignificant...

The key question is why is the stockholder surrendering its shares doing this?

Rana Pratap said...

Incentives, Prof all the rest is commentary

Rana Pratap said...

Allow me to elaborate

There are a debt instrument that the management issued of around 100 crores which can be converted into equity later, now unless the price hits the target conversion price, the company would have to pay out the cash from it's books, nobody likes to do that

And this is not the ONLY shareholder friendly thing that management has done, there is also an impending spin-off on the cards which will be carried out later

All in all, management's incentives are totally aligned with the OPMI who is looking for capital appreciation from the equity of this company

I am a participant or at least was a participant in this event and got a decent ROI over a relatively short duration of time

More diversity is invited :) :), would not mind jumping back into the equity if there is something positive that I missed out in my analysis

Luv and Kisses