There will not be any premium, both stock prices will converge, ideally they should have converged today. Convergence is inevitable between two stocks as the merger has opened a risk free arbitrage opportunity. Buying the lower priced stock (Apollo Tricoat) and shorting higher priced one (APL Apollo) will net you risk free gains.
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Management expects synergies across cost, products, and branding and expects minimum improvement of Rs. 150/tonne in EBITDA margin although the exact quantum of synergies is to be provided latter. The merger would also facilitate faster capacity expansion and facilitate penetration of Tricoat products in West and East.
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Would be good if you can explain how this trade can be executed in real. I understand neither APL Apollo Tubes nor Tricoat is not listed in derivatives market, so is there any other way to take a positional short position and long position?
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If you own APL Apollo shares sell them and buy Apollo Tricoat. 14% risk free return just based on today’s price. If you do not own APL Apollo, you can buy Apollo Tricoat and sell them after the merger.
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Seems like a great arbitrage opportunity here. In any case these stocks has to trade at same valuation as it reaches to merger. There are huge bulk deals happening in APL Appolo counter even pushing it’s price higher. May be of the assumption that this merger will lead to higher margins for the parent company. But it’s a curious case that when such an arbitrage exists why to go and buy the parent at high valuations. Is it because of the low liquidity with tricoat as it’s listed in BSE. ?
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Because efficient market hypothesis is a lie. Because a large part of the participants are traders who only care about the price chart not about underlying fundamentals. And yes, like you identified the parent’s stock is much more highly identified/famous and liquid.
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APL Apollo Tubes equity will get diluted by 10.8%. Equity dilution is just opposite of a share buyback. Share price increases in buyback while share price decreases in equity dilution. Share pricces of APL Apollo and Apollo Tricoat are moving in tandem. Once the merger happens, APL Apollo share price will reduce by 10.8%. Right now APL Apollo share price is Rs.1243. If we dilute this share price by 10.8%, we come to a price of Rs.1108 (Rs.1243 x .892 = Rs.1108). Current share price of Apollo Tricoat is Rs.1097. Thus, market is pricing in the equity dilution. This is how I could construe the present price scenario.
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Apollo Tricoat is just a part of APL Apollo’s business. There is a much bigger chunk whose valuation depends on things like volume growth, steel prices, capacity utilization and many other factors.
Over the past few days every single steel stock has been higher, why shouldn’t Apollo Tricoat and APL Apollo not move higher too if the market expects a rocking Q4 earnings boost to steel makers and steel convertors?
While the math involved in the merger is no doubt important, there are many more factors that can explain why the prices are moving higher in lockstep. Apollo Tricoat is not a going concern anymore since it has a finite shelf life as a business, APL Apollo on the other hand is a going concern where investors can take a 10 year view.
Consider all possible factors before coming to any conclusions and taking any positions.
For someone to play arbitrage well, one needs to know the timelines involved. As of now we don’t know when the merger will be effective since approvals can take fairly long. In the meantime what if the market dives and stocks head lower by 15%? Market will look at the arbitrage angle only after clarity arrives on when the merger will go through.
Disclosure: Invested in APL Apollo since 2014, transactions in the last 30 days. No investments in Apollo Tricoat
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I am invested in Tricoat but I am happy that the merger has taken place. Running two companies under these conditions is a nightmare with problems with marketing executives approaching the same dealer networks, subtly running the sister concern product down to make his own sales, finance and accounting mess, potential problems with tax authorities etc etc.
Now the business has become straight forward without the daily adjustments at every level. Since Tricoat is a surprise success, the parent company can now allocate adequate financial, operational and marketing resources till it reaches a mature stage.
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I have seen that the company which is going to be merged is sold at discount always. Recent example is Gruh Finance with Bandhan Bank. Gruh continued to trade lower but discount reduced little as it approached merger date. Even last day of trade, Gruh was at discount. So I think, there is some rationale we are not able to figure out. How can highly liquid Gruh can trade at discount ? May be after merger, it will take some days to reflect in demat account. Market is discounting that as one can not sell if stock crashes in those days.
Can anyone explain tax implications for Tricoat shareholders after merger ?
Disclosure - I own Apl Apollo and no plan to switch
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I don’t think this reasoning is correct. Let me explain why. This is correct for equity dilution generally. But not a rule.
eg: In the case of banks, if Equity dilution is happening at a valuation of > 1x Book Value, then overall it leads to growth of book value per share and if market believes bank will utilize funds well, then stock price goes up despite the equity dilution.
Coming to case of apl apollo, this is not a equity dilution, its a merger: number of shares will increase by 10%, but the total assets+earning power backing the company also goes up by 10%. Hence, there is really no reason that the stock price should correct 10% post merger (of course it can if the market crashes or if company gets derated if market believes the merger was a wrong decision).
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Any one knows why is Tricoat available at a discount of around Rs 200 in comparison to Apollo tubes ? If there is no risk then it seems a good arbitrage opportunity for those holding apollo tubes or even for fresh cash investment in Tricoat.
Though I am repeating myself here, how can one play arbitrage when you don’t even know the timelines involved?
The current discount to the APL Apollo share does not matter. Even if the discount ends up being 400 per share, what assurance does one have that the Apollo Tricoat share does not trade lower till the time the merger gets all approvals? You buy Apollo Tricoat today at 1150 looking at the discount to the APL Apollo Share and think you are getting a good deal but what if the merger takes 12 months to get approved? What if the price of Apollo Tricoat then is 600 while APL Apollo trades at 800? You would have paid almost 40% higher today to buy the same business after 12 months.
Minda Industries announced acquisition of Harita Seating systems in 2019 and this got approved only in February 2021
Lux Industries has been trying to merge two unlisted subsidiaries for more than 2 years now
Please think through all possibilities. Special situations and arbitrage can be played only when the timelines are clear and unambiguous.
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IMHO, one should buy only if in one’s view point the intrinsic value of the merged company is more than the price paid.
Disclosure: Invested in ATL after the announcement and hence the views are biased. I am not a SEBI registed advisor. The above is only my point of view and not a recommendation to buy or not to buy.
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Thank you for the Excellent explanation of the situation. It has spelled out the possible risk very clearly.
If merger goes through and price rises: I own merged shares at cheaper rate, more profit
If merger goes through and price reduces: I own merged shares at cheaper rate, Less loss
If merger fails: I already own fastest growing part of the group, keep holding
Invested in Apollo Tricoat from lower levels
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As per the Disclosure letter filed by the Company with SEBI, the stake of promoters in the combined entity is reduced from 37.03% to 33.44% abd Public Shareholding is increasing accordingly… Still they have proposed for the merger. IMHO this indicates the confidence of the Promoters in the expected performance of the merged entity.
Disclosures I have invested in ATL after the merger proposal . My views are biased. I am not SEBI registered Advisor.
The present APL apollo promoters inherited a very small size business. They have taken it to national level with an exceptional market share and there is plenty of room to grow for many years. The growth has been accelerating as they keep acquiring more financial and marketing strength. I noticed this company only a couple of months back and was immediately drawn to it. I chose Tricoat over APL apollo as I could see that it will grow geometrically for some years with a good product, and strong promoters giving it a free ride. However APL apollo becomes a similar bet with Tricoat merging with it. It is encouraging that in spite of rapid price increase in last 12 months it is still appreciating. I have a feeling that big guns are still to notice it. That should happen when its market cap rises sufficiently. Meanwhile the growth triggers look robust for next couple of years at least.
Steel tube manufacturing is a fairly simple process. I had some exposure to it as an intermittent industrial buyer for certain projects 10 to 20 years back. Because of low entry threshold many people had entered but most perished due to cut throat competition. However these guys not only survived but have now created a moat in manufacturing by bringing out differentiated products, a moat in purchasing scale of steel, a moat in costing by rolling HRC instead of buying CRC, and a moat in distribution and marketing. It will be very difficult to topple them if they continue to do business sincerely and do not make strategic mistakes.
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Splendid performance continues !!
Performance Review for Q4FY21 vs. Q4FY20
Sales Volume improved by 74% to 66,140ton
Net Revenue increased by 104% to Rs. 4,679mn
EBITDA increased by 108% to Rs507mn
EBITDA per ton was Rs. 7,671/ton (increase of 20% YoY)
Net Profit increased by 209% to Rs343mn
Performance Review for FY21 vs. FY20
Sales Volume improved by 88% to 231,490 ton
EBITDA increased by 120% to Rs1,637mn
EBITDA per ton was Rs7,071 (increase of 17% YoY)
Net Profit increased by 148% to Rs1,050mn
Net debt declined by Rs556mn to Rs522mn
ROCE improved to 44.9% from 20.2% and ROE to 41.7% from 21.2%
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I started reading about company recently only post merger announcement.
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I uncovered Conflicting image which remain unanswered. Let me know if I am wrong.
– (AR 2019 pg 28)
But AR 2020 (pg 8) states it only 75,000 -
Also, company doesn’t have a consistent investor presentation. It changes its style of presenting quarterly data which doesn’t allow comparison with previous year data. (it changed brand wise data from FY 20 to FY21 & didn’t provide brand wise data for Q4 FY21 & FY21 consolidated).
Let me know, in case there is error in my understanding.
Disclosure - invested
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