Control premium in India Ernst & Young LLP July 2017
Executive summary Control premium: Concept Control premium is the difference between the pro-rata controlling interest and the pro-rata non-controlling interest. It is therefore quantified as the excess of the price for a controlling stake in the target company being acquired over its publicly traded share price. This study measures the control premium in India over a 15-year period during FY03 FY17. Methodology Conclusions Control premium Control value Open offers between FY03 and FY17 with an offer size exceeding INR 10 million were analyzed. Average of two-week and 26-week prices prior to the public announcement of the offer was considered as the base price. 373 transactions were identified, of which 303 transactions (81%) exhibited above nil control premium. Median control premiums of 31% based on 26W average price and 12% based on 2W average price were observed. The highest premium was observed in the consumer goods sector, while the lowest premium was observed in the engineering, procurement and construction (EPC) space. The quantum of control premiums was negatively correlated to the equity market movement. 26W premium was broadly in the range of a few global studies. Marketable minority interest value Control premium is the difference between the pro-rata controlling interest and the pro-rata non-controlling interest. It is thus quantified as the excess of the price for a controlling stake in the target company being acquired over its publicly traded share price. Source: EY Analysis based on data from www.sebi.com Minority interest discount 2 Control premium in India
Control premium in India: Methodology Control premium in India: Methodology We analysed open offers between FY03 and FY17, each of which had an offer size exceeding INR 10 million*. The companies with infrequent trading in shares for a period of one year prior to the announcement of the offer and companies where consolidation of holdings was the object of the offer were excluded. The average of two-week and 26-week prices prior to the public announcement of the offer was considered as the base price. Base price is a price that is unaffected by the transaction. For developed countries, typically a period ranging from one day to two-month average is considered. In India, where news/rumors of an impending transaction typically float around long before an official announcement, a longer period is suitable. Besides, SEBI regulations stipulate acquirers to look at a longer term average when buying out minority shareholding. 373 transactions were identified, of which 303 transactions (81%) exhibited above nil control premium. *Source www.sebi.gov.in Control premium in India 3
Observations on control premium in India Financial Year Number of transactions Mean Premium Median Premium Offer Size Weighted Mean Premium Base26W Base2W Base26W Base2W Base26W Base2W 2003 6 99% 52% 88% 48% 118% 67% 2004 11 71% 23% 52% 12% 28% 16% 2005 11 88% 23% 49% 6% 45% 10% 2006 25 43% 9% 37% 4% 43% 9% 2007 29 33% 16% 20% 11% 22% 6% 2008 38 36% 19% 26% 12% 37% 22% 2009 44 46% 37% 29% 20% 55% 37% 2010 30 64% 21% 37% 8% 48% 18% 2011 18 39% 8% 24% 9% 15% 22% 2012 19 56% 49% 22% 14% 60% 45% 2013 17 47% 37% 34% 16% 65% 60% 2014 8 44% 34% 37% 19% 44% 15% 2015 20 34% 17% 31% 10% 21% 11% 2016 11 24% 17% 24% 16% 11% -5% 2017 16 39% 15% 10% 4% 35% 12% 2003-17* 303 47% 24% 31% 12% 38% 22% Source: EY Analysis based on data from www.sebi.com The average and median premiums for the period considered were 47% and 31% based on 26W average prices as the base and 24% and 12% based on 2W average prices as the base. Median premiums were considered more representative, as mean premiums were impacted by outliers (offer size weighted premiums were between the median and mean premiums). Premiums based on 26W average prices are higher than 2W average prices. It may confirm the view that information leakages are high in India, or 26W premiums may have been impacted by rising stock markets in India in the past 15 years. 4 Control premium in India
Variability in premium: There was a significant degree of variability in the overall premiums as well as within each year. Range of control premiums % of transactions having control premium 25% 20% 15% 10% 5% 0% 21% Source: EY analysis based on data from www.sebi.com 16% 12% 14% < 10% 10%-20% 20%-30% 30%-40% 40%-50% 50%-60% >60% Control premium (%) 9% 7% 22% Correlation with equity market levels: There was strong negative linear correlation between control premiums and movement in the equity markets (BSE Sensex movement being used as a proxy). Control premiums came down with rising markets and vice-versa. Median premiums (Base: 26W) and Sensex BSE Sensex 30,000 25,000 20,000 15,000 10,000 5,000-88% 52% 49% 37% 37% 29% 34% 37% 26% 31% 20% 24% 22% 24% 10% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 100% 80% 60% 40% 20% 0% Premium (%) Source: EY analysis based on data from www.sebi.com Sensex levels refer to the average Sensex level during the relevant FY. Control premium in India 5
Control premiums by industry The highest premiums were observed in the consumer goods industry, while the lowest were in the EPC industry. Control premiums by industry 90% 84.9% 80% 70% 60% 50% 40% 30% 20% 10% 31.4% 5.3% 25.5% 30.0% 14.3% 15.8% 27.3% 16.2% 4.9% 28.5% 8.7% 33.8% 22.6% 23.8% 18.8% 19.3% 19.8% 15.5% 7.5% 4.2% 19.1% 32.4% 12.7% 45.1% 35.4% 22.7% 18.0% 41.6% 40.2% 6.1% 14.0% 0% Auto and auto ancillaries (13) Cement and Chemicals building and products fertilisers (21) (10) Consumer goods (10) EPC (10) Financial services (42) Industrials - Capital goods (25) Information technology (34) Infrastructure Media & (6) Entertainment (21) Services (6) Textiles (23) Natural resources (23) Pharmaceuticals and healthcare (24) Hospitality and Real estate (12) Paper and packaging (7) Premium over 26W avg base (%) Premium over 2W avg base (%) Source: EY analysis based on data from www.sebi.com Note: Industries with five or fewer transactions were ignored. 6 Control premium in India
Control premium: Global examples Mergerstat Review s control premium: Over the past three years (up to March 2016), the quarterly median control premium in the US has ranged from 26% to 37%. Quarter-wise cntrol premiums in USA 40% 35% 30% Control premium 25% 20% 15% 10% 5% 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 3-Month Median Premium (%) Ernst & Young Australia s control premium study (2009): Average control premium was 28% based on one-day prices and 48% based on one-month prices. Median control premium was 26% based on one-day prices and 34% based on one-month prices. India s 26-week premiums are within the range of these global examples. Control premium in India 7
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Connect with the India valuation team Navin Vohra Partner & India Head 3rd & 6th Floor, Worldmark-1 IGI Airport Hospitality District Aerocity, New Delhi - 110 037 +91 22 619 20930 navin.vohra@in.ey.com Parag Mehta Partner The Ruby, 29 Senapati Bapat Marg,Tulsi Pipe Road, Dadar (W), Mumbai +91 22 619 21135 parag.mehta@in.ey.com Sorabh Kataria Partner Nirlon Knowledge Park, W Expressway Highway, Goregaon (E), Mumbai +91 22 629 22386 sorabh.kataria@in.ey.com Amish Mehta Partner Nirlon Knowledge Park, W Expressway Highway, Goregaon (E), Mumbai +91 22 619 20217 amish.mehta@in.ey.com Venkat Ketharaju Executive Director UB City Canberra Block, No.24, Vittal Mallya Road, Bengaluru, Karnataka +91 80 672 85312 venkat.ketharaju@in.ey.com Pradeep Gupta Executive Director Golf View Corporate Tower B, Sector 42 Sector Road, Gurgaon, Haryana +91 11 667 18693 pradeep.gupta@in.ey.com Control premium in India 9
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