ValuePickr Forum

Prabhat Dairy - Special situation 2019

Background:

On 9th January 2019, Prabhat Dairy announced its plans of entering the animal nutrition
business and partnership with DLG, the Denmark based world leader in high-quality vitamin-mineral feeds.

On 21st January 2019, company announced that it has “entered into definitive
agreements with Tirumaia Milk Products Private Limited, a wholly owned subsidiary of French
dairy multinational Groupe Lactalis,for the sale of its dairy business for a consideration of INR
1.700 crore. The transaction involves sale of the dairy business undertaking of Prabhat Dairy by way of
slump sale on a going concern basis, along with the sale of 100% shareholding in Suntresn
Agro Industries Private Limited (a step—down subsidiary of Prabhat Dairy Limited) via a share
purchase agreement.”

“The Company intends to share a substantial portion of the proceeds from the sale With
shareholders after meeting its tax and transaction cost obligations. After Closing of the
Transaction. Prabhat Dairy Limited intends to further develop its cattle feed business in various
parts of the country, as well as expand into allied businesses such as animal nutrition and
animal genetics.”

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Next day the market rejoiced with upper circuit for brief period but investors wary of recent experience with Leel Electricals etc. dumped the share 15% down. It did not help that twitter and media “experts” predicted that minority investors would be short-changed. Only one long term institutional shareholder (ALQUITY SICAV - ALQUITY INDIAN SUBCONTINENT FUND) bailed out on 22nd January. No other major institutional shareholders seemed to have reduced/exited their holding. At least no disclosures in this regard were notified to the exchanges.


Company came up with a clarification same day at night rebutting the “speculative” news flow around the deal and reiterated that (1) substantial portion of the proceeds would be shared after meeting tax and transaction costs (2) in most optimal manner (3) proceeds means all proceeds including from subsidiaries.

Stock went on lower circuit loop for few more days till 5th February when the company announced that it was considering to merge Cheese Land Agro with itself. Stock went up after that. EGM for the approval of the slump sale of the dairy business to Tirumala Milk Products was planned for 26th March. On 25th March company came out with a update, that the board has decided that an Escrow account shall be set up into which the net proceeds of the Transactions, after meeting tax obligations, indemnity obligations and transaction costs will be deposited. Also a “Transaction Committee" consisting of at least three independent directors and not
than two other directors, who will oversee, supervise and manage the utilization of the
proceeds from the Transactions in the Escrow account held in trust for the shareholders. And no part of the proceeds from the Transactions will be deployed towards residual business of the Company i.e. the animal nutrition and cattle feed business.

Proceeding of the EGM, state that approximately INR 1000 cr -1200 cr
might be available for distribution to the shareholders. The EGM resolution was passed.

Current MCAP of the company is around 720 cr. I have not worked out the actual payout if they go for special dividend (taking into account the dividend distribution tax ~18%) or if they go for a buyback. Payout could be greater than the cmp and we could also end up with the future animal feed, nutrition business. Yes it all ends up how honest the promoters are and if they stick to their words. Company could have come up with the clarifications earlier and could have prevent all this drama. With the volume of trading done, looks like some insiders/operators would have surely benefited from the movement the past few weeks. IPO of the company was in August 2015 but the promoters have good background in the dairy sector for decades, so maybe they might be able to grow this animal feed, nutrition business.

Please let me know your thoughts on this.

disc - invested

3 Likes

Why did majority public institutions shareholders vote against the deal ?

Because company did not disclose how it came up with 1700 cr figure for the sale of the business. Proxy firms also asked to vote against the deal as there is no clarity what will the company do in the future. Some institutions have abstained from the voting.

Best thing for the public shareholders would have been if the promoters had sold their stake in the listed company triggering to open offer etc. Shareholders who had bought the shares thinking they would be partners in the dairy business now end up with animal nutrition business, The deal was structured to be favourable to the buyer.

As usual the media comes out with scary headline and in the article does not even note the announcement made by the company of setting majority independent directors committee, Escrow account, not using this money for residual business etc

Only 55% of the public institutions voted and 99% of the votes was against the sale.
22% of public non-institution voted and 98% was in favour.
Obviously promoters voted FOR. Overall 92.2% votes polled in favour.

Public institutions (active/passive) should be mandated to vote by law. They cannot just stay on the sidelines and give gyan on corporate governance since they have a fiduciary responsibility towards their unit holders.

What might be the reasons that there is no further announcement from management in regards to the money being returned to investors? The last filing in this regard is on March 27, 2019 in which a brief idea about the net proceeds was given by Mr Raviraj Vahadane. In which he mentioned that after taking care of various transaction cost involved and debt, approximately 1000-1200 crore may be available for distribution. April 11, 2019 filing states that the deal was formally closed.

Further they had creditors meeting, which also went smoothly. In another filing today (May 7), a notice about extraordinary AGM on May 29th is placed. The agenda of meeting being

  1. change in the name of the Company from Prabhat Dairy Limited to Prabhat Agrivet Industries Limited
  2. Changing the clauses in memorandum as company is changing business.

When I queried about the same to company secretary via mail. His response was:

“The Company has completed the sale of business transaction on 10th April, 2019. Currently the Company is in the process of transition of operations to Sunfresh Agro Industries Private Limited.
The Company has clearly expressed its intention to return the capital to the shareholders in the most optimal manner, subject to the applicable laws and requisite approvals.
The Board of Directors shall take the decision on return of transaction proceeds to the shareholders in some period of time.
We request you not to fall prey to marker rumours and speculations.”

What might be the intention of delaying? Is company just beating around the bush and have no such intentions?

These decisions take some time, let’s wait and see what the company has to offer. I also don’t have any idea when they will announce.

Sent mail to company regarding status of the plan of returning the capital to the shareholders and what is the expected timeline for the same. Following is the response. Let’s hope for the best.

===

Dear Shareholder,

The Company has completed the transaction on 10th April, 2019. Currently the Company is in the process of transition of operations to Sunfresh Agro Industries Private Limited and closing of audit for the financial year 2018-19.

The Company has clearly expressed its intention to return the capital to the shareholders in the most optimal manner, subject to the applicable laws and requisite approvals.

The Board of Directors shall take the decision on return of transaction proceeds to the shareholders in some period of time.

We request you not to fall prey to marker rumours and speculations.

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As per the latest BSE filing, the company’s proposed resolutions of changing the name of the company and charter have not been passed. The CS said that since these were special resolutions they needed 75% of the shareholders’ approval to pass this and this resolution got only 64%.

So now, they cant get into animal nutrition.

I think once company come up with some definite plan on distributing the proceeds of the sale, then shareholders will be more ready to vote for the scheme. The other proposals to include independent directors did pass in the EGM. I am not sure of the rules if they can call for EGM again for the same proposal which got defeated, and the timelines regarding it.

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Will there be any impact in the proposal given now there would be 20% tax on Buy Backs ?

Disclosure : Invested.

Yes, now dividend and buyback would be taxed similarly from the company’s point of view. I think the company was waiting for budget to see if LTCG, DDT etc is altered but it has become even bad by this increase in buyback tax on listed companies. Lets see when and what the company announces. Request all shareholders to keep pressure by calling/sending mails to the company secretary. Please share phone-numbers if you have.

[email protected]
[email protected],
[email protected],
[email protected],
[email protected]

Thanks for the reply.

  1. Still relatively for Promoters, the Buy Back is better than Dividend as Dividends are taxed further as well at 10%.

  2. Not sure how the budget would nudge the Promoters decision making now. If they were thinking of buy back, why they were even waiting for so long as buy back is better in the earlier rules.

  3. Can the promoters just maintain status quo with the cash in hand ? Then it would be serious negative to other shareholders right ?

  1. We still have to pay 10% LTCG of the price difference between buyback and acquisition. Maybe because of the grandfathering clause, maybe LTCG will be zero since price of the share was higher at that point. I am not too sure and we need to check. Also delisting also could be another option.

  2. Maybe they were hoping of some investor friendly moves in the budget.

  3. I don’t think so shareholders will wait for more than a quarter. It makes no economic sense for promoters also to hold money idle in the escrow account if they have honest intentions. Best would be to get this over asap and start growing their new business from their personal returns.

More details on the sale by Prabhat Dairy of its core dairy business , Lactalis buys Prabhat Dairy to expand India footprint.

1 Like

Thanks for sharing. How did the company in EGM state that around INR 1000 cr -1200 cr will be available for distribution. As per this article, its much higher number of Rs1459 cr. I think company was including debt portion in its calculation.

  • No further tax applies to the investor. (There’s a section 34A that says no capital gains will apply for buybacks either, anymore)

New website launched which talks about cattle feed & animal nutrition

http://prabhat-india.in

Hi,

Anyone got replies from their IR team ? Not being able to get any updates. Not able to see closure.

Hi. Spoke to CS today. She said:

  1. They may announce the rewards in a month’s time
  2. They may try for another special resolution to change article of association so that they can get into animal nutrition. This may happen during AGM.
2 Likes

Hi,

Could someone clarify something for me.

As per the FY 2019 Balance Sheet :

• Assets Classified as “Held for Sale” = Rs. 1,420.51 Crores
• Liabilities directly associated with Assets “Held for Sale” = Rs. 658.82 Crores

These are clear cut, discrete entries on the Balance Sheet.

That gives us a “net” value of Rs. 761 Crores left for distribution.

How is the management claiming Rs. 1000 to 1200 Crores available for distribution?

What am I missing here?

Mohit
[email protected]