(Pasting the relevant section below, apologies about the incorrect formatting.)
The more i read it, the more it doesn’t seem that right. Would Mr.Isaac know of these nuances while selling stake to Thomas Cook? Also, if this is done once, what’s to say it won’t happen again?
Am i missing something?
“Proposals to retain buy in of Mr. Ajit Isaac
Your Company’s Management believes that in the interest of continued longer term growth and profitability of Quess, it is imperative
that (i) Mr. Ajit Isaac retains the role of being the CEO of Quess and a joint venture partner of the company, as also (ii) remains
a significant shareholder of the company and, therefore, continue to have a strong commitment to enhancing shareholder value.
Responding to the concerns of Mr. Ajit Isaac and to secure his full commitment to the Quess performance, the Board of Quess has
decided to make a Rights Issue of an aggregate of 2,560,000 shares of Rs. 10/- each at a nominal price of Rs. 10/- constituting 8.8%
of the fully diluted equity capital of Quess. Of these, 1,957,302 rights shares are offered for subscription by Thomas Cook, on a pro
3
rata basis, based on its existing holding in Quess. It has been further proposed that your Company would not subscribe to its rights
entitlement of 1,957,302 shares of Rs. 10/- each and renounce them in favour of Mr. Ajit Isaac and/or his nominees. Consequently,
Mr. Ajit Isaac and/or his nominees would thus be able to subscribe to bulk of the Rights Issue entitlement. This would increase his
shareholding in Quess to a level of 28.78% of the fully-diluted equity capital and would dilute the shareholding of Thomas Cook to
66.71% of the fully diluted equity capital (as against 68.04% of the fully diluted equity capital at present).
Rationale for the Proposal
The move to not subscribe to the rights shares and to renounce them in favour of Mr. Ajit Isaac and/or his nominees is primarily
designed to ensure Mr. Ajit Isaac continuing to retain material equity interest in the Company and a commitment on his part to
continue to serve as the CEO of the Company for foreseeable future. The management of your Company believes that these steps,
while in the short term may appear to be dilutive of the interest of Thomas Cook (and consequently its shareholders) in Quess, in
the longer term, Mr. Ajit Isaac’s continued involvement and leadership would provide huge stability to the organization and help
it to maintain its growth momentum and lead to significant value creation for all shareholders, including your Company as the
largest shareholder of Quess.”
Agree and that too at nominal price. Why not issue ESOPS which are linked
to present market price. While Ajit Isaac is the driving force behind Quess
can’t understand what additional gain will happen if he controls more than
25%.
Really poor corporate governance - allowing for promoters to come in at face value, not even at book value is the equivalent of taking out all extra juice. if anything, it should be at least linked to performance milestones - a carte blanche dilution at one go is’nt a great sign. This could have also been done through recapitalization too. Rights issue done at par, the majority shareholder renouncing it completely ot favour a minority shareholder in an unlisted company at the expense of minority shareholders in the listed entity is definitely not value accretive in the short run for sure. Why did’nt they do a price discovery and allow for ajit isaac to bring in cash as a preferential allotment ?
the threshold of 26 % had to be crossed to provide for veto powers to ajit isaac - so that he has a say in the board. That’s the only reason why this could be happening.
Agreed. To be fair, of the 1.96 million shares proposed for a rights issue, 1 million will be held in an escrow for 8 years. (extract pasted below). But, 1 million shares at the face value is unfair enough.
Q: as a retail minority, what can be done to ensure this doesn’t go through as is?
========== Other incidental matters
In order to demonstrate good faith on his part, Mr. Ajit Isaac has offered to put 1,000,000 equity shares of Quess, from and out of the shares currently held by him / entities controlled by him into an Escrow. The Escrow Agreement will stipulate that in the event of: (i) Mr. Ajit Isaac ceasing to be a promoter director of Quess, (ii) Mr. Ajit Isaac breaching any of his lawfully incurred obligations to the Company, (iii) Mr. Ajit Isaac breaching any of his lawfully incurred obligations to Quess during the next eight years, the Escrow Shares or the value thereof would be made over to Thomas Cook, subject to compliance with regulatory considerations. However, if the conditions and covenants are met for the defined period of time, i.e. up to 31st March, 2023, the Escrow agent will release those Escrowed Shares to Mr. Ajit Isaac.
Perhaps there are some clauses in the agreement between Thom Cook and Ikya at the time of takeover by Thom Cook; may be there was some understanding not reduced to writing then and which Mr Issac wants to ‘regularise’ now. This move is definitely anti minority shareholders in the short and perhaps in the medium term.
I dont understand why this is a corporate governance issue ‘against’ the minority shareholder.
Lets say you invest with a partnership where one partner is 80% and other 20%. There is some mis-understanding between the partners and now the junior partner wants a bigger share. The main partner has two options
a. Pick a fight on principle as the junior partner is going back on his word and see the value of the company suffer. So instead of having a 3X in 5 years, one is left with a 1.5 X
b. Be rational and give away 10% of the partnership, but ensure that we have a slight smaller piece of a larger pie.
As a minority shareholder, rationally thinking, what should we prefer ? option a ‘feels’ better, because it is equivalent to what we sometime go through when a hire an auto where after the reaching the destination the driver asks for more money
on top of this the management has shared their thinking and have asked for approvals. This episode does not leave a good taste and creates an apprehension in mind (will this happen again with Quess ?). but how is this is a corporate governance issue ?
what you are saying could be true - that’s an assumption you are making that b is what is true. and truth is right now we’re giving away a chunk of the pie and hoping for a better result. Its’ the equivalent of an auto driver saying after you have got in for an extra amount upfront (remember dilution happens today) and promising you that he will make your ride far more comfortable (hope). Money goes out right now and one has to live on hope.
I hold thomas cook and its unbecoming of someone like prem watsa to change the rules of the game in between. That said, I am not irrational and I will add more if thomas cook falls below 190.
ok …what would you do if you are in the management’s place as the facts stand today (assuming you cannot turn the clock )
We have two bad options …which one do you choose ?
This should be viewed in light of possible IPO for Quess. There were news report of conflicts between Thomas Cook’s management ( aka Fairfax ) and Ajit Isaac. There we were - Prem Watsa’s standing their and not able to fork out Quess with Ajit in it, Ajit Isaac not wanting to have long term commitment without having significant stake in it and minority shareholders waiting for IPO ;).
In this context , I view it as solution to grid lock so we all could march ahead.
Second, Mr. Isaac is putting 1 million shares for 8 year lock in. So we can be reasonably assured of Mr. Isaac being with Quess till 2023. if Adecco had similar deal for him when buying PoepleOne , we might not have got Quess. Mr. Isaac can move out and rebuild it all over again on his own.
Then, I doubt if I would have liked any rights issued to me with more than 1 year lock-in period.
In the over all context and bigger plans of Thomas cook, I would be in favor of TC resolving matters fast. My bigger worry would be if they do not fork out Quess or keep repeating same mistake in future.
You are entitled to your view. But please remember, even Corporate giants have fallen because of inadequate disclosures and shareholders now do vote with their feet.
This is an issue of ‘quality’ and perception cannot be quantified
I agree with you - but these type of stuff always begin with a small step and keeps escalating - as the immmediate terms become bigger and juicier. Not something I would worry about still - but I have to be cognizant of this. best is to build into MoS - to each his own.
As investors, we rather have the Driver locked down for a certain period of time - a classic demonstration of the alignment in the IT sector - a sector where EBIDTA margins rarely go beyond 5% here is Ajit who believes we can get 8% margins - additionally he has been able to attract sellers willing to sell - to him. I agree this deal leaves a bit of after taste - but lesson learnt and course corrected, hopefully.
Unfortunately, things are never so simple or straightforward that all/a majority of investors will exit a stock based on some point about which there is no clarity. Thomas Cook may not exit Quess so easily and Mr Issac knows it well.
Disclosure: Invested for last one year. I regret that I overlooked disclosing my interest.
Dont agree - things are always fluid - I am sure things that were thought of when the deal between TC and quess was signed have changed now. The issue is not changing terms but if they can they are favourable to minority shareholders. Remember that’s its the species that adapts itself to circumstances that survives in the long run.
At this point of time, given prem watsa’s record and ajit isaac’s record, I am willing to give tthem the benefit of doubt
My disclosure "Disclosure: Invested for last one year. I regret that I overlooked disclosing my interest.“
and
"Unfortunately, things are never so simple or straightforward that all/a majority of investors will exit a stock based on some point about which there is no clarity.”
The same thing as you have said, in different words. Why do you think I did not exit.
