To,
The Board of Directors,
Ador Fontech Ltd.
Dear Sir,
It is with deep anguish & distress that we are writing to you to register our protest against the blatantly inequitable, unfair, illogical, unacceptable & one sided swap ratio announced by you w.r.t the merger of our company with a promoter group company, AWL (Ador Welding Ltd.).
We are shocked to note that the swap ratio grossly undervalues Ador Fontech Ltd. (AFL). Please note that the current Market Capitalisation of AFL ~ ₹237cr (CMP ~ ₹68/-) is the same as on June 2011 (11 years back) whereas the Market Capitalisation of AWL has increased almost 4x from 2011 levels. This under performance of AFL share price, vis a vis AWL was purely due to poor corporate governance in AFL (hoarding shareholders cash & extending loans to promoter group cos like Ador Powertron, instead of share buy backs, diversification into unrelated & loss making businesses like 3D Future Tech, poor investor communications, etc.). Thus, having caused the undervaluation in the first place, now the same is being used as a pretext to acquire AFL on the cheap!
AFL is being acquired by AWL. Common sense suggests that any acquisition offer has to be given at a substantial premium to the prevailing market price. But defying all logic, AFL is being sought to be bought by AWL at current market prices without any premium whatsoever!
As per the proposed scheme of arrangement, AWL will offer ~ 38 lakhs shares (valued at ~ ₹232cr @ CMP of ₹610/-) to acquire the whole of AFL (in the ratio 5:46 :: AWL:AFL). Post merger, the earning per share (EPS) of AWL will increase by over 21% from ~ ₹33/- to over ₹40/- & the net cash balance of AWL will increase four fold from ~ ₹20cr to ₹80cr.!
AFL shareholders are being forced to subsidise AWL shareholders. This clearly shows why AWL shareholders are so excited with the proposed swap ratio.
AWL with 2x the Networth, & 1.8x the Net Profit of AFL is being valued at over 3.5x the Market Capitalisation of AFL! This, when during the last 5 years, the profits of AFL have grown at a faster rate than AWL (24% vs 16%)!
A cursory glance at the promoter shareholding ~ 39% in AFL vs ~ 57% in AWL, gives away the true motivation of promoters for pushing with such lopsided merger valuation.
Therefore, before you move ahead with this dubious transaction, please consider whether the gains arising out of duping 61% of your shareholders in AFL are greater than the harm it will cause to your reputation.
If this transaction goes through in its present form, then it will be a permanent blot on your good name, and it will pull down the valuation of your whole group, as, if the promoter can cheat minority shareholders in one company then he can be expected to do the same elsewhere too.
Since the EPS of AFL is ~ Rs.7/- & EPS of AWL is ~ Rs.33/-, a swap ratio of 1:5 :: AWL : AFL (1 shares of AWL for every 5 shares of AFL) will be EPS neutral for AWL shareholders & much fairer to AFL shareholders.
Please consider this appeal with an open mind in the interest of all concerned.
Let wise counsel prevail.
Regards