Radhakishan Damani, better known as DMart’s promoter, is among India’s savviest stock market investors. Recently, he bought an additional stake in cigarette maker VST Industries.
Currently, Damani along with his investment arms is the single largest shareholder in the company with more than a 30% stake. But there was a time when he locked horns with ITC to buy a massive stake in VST Industries.
In this article, we shall take a look at the backstory and find out how events unfolded leading to a bidding war between Damani and ITC. Keep reading to find out!
The year was 2001
Damani was known for his soft-spoken and reclusive nature. But, he surprised even his closest associates by making a hostile bid for VST Industries, controlled by British American Tobacco (BAT).
Damani had already acquired cult status in the Indian stock market, both as a trader as well as a value investor. He had accumulated a 15% stake in VST Industries at an average price of ₹88 per share.
In February 2001, Damani said that he was willing to buy an additional 20% stake in VST Industries at ₹112 per share. This price was 26% higher than the market price of the company on that day.
Damani’s statement invited ITC — India’s largest cigarette manufacturer, to prevent him from buying the stake.
While Damani was willing to pay ₹112 per share for an additional 20% stake in VST Industries, ITC said that it would buy the shares at ₹115 per share. A little later, it went further by saying that it was willing to buy the shares at ₹126 per share.
Just like VST Industries, even ITC was controlled by BAT. It was not clear if ITC’s move to buy VST’s shares at a higher price was motivated by self-interest or if it received a nudge from BAT.
But, Damani did not give up! He said that he was willing to pay ₹151 per share and buy a 30% stake, instead of 20% earlier. However, he failed to win over financial institutions which collectively held a substantial stake at that time.
Why was Damani willing to pay so much?
Well, who wouldn’t like a business with good cash flows and a high barrier to entry? On the face of it, an investment in VST Industries seemed to be good.
A few market watchers, however, felt that Damani wanted to portray that the stock was undervalued and this move would boost its market value.
Was BAT incapable of knocking down Damani’s bid?
Damani did not underestimate BAT’s capability to hit back. However, he believed that it would be unable to counterattack quickly, as there were restrictions on foreign tobacco companies increasing their tobacco investments in India.
Things went wrong for Damani
Regulatory approvals are usually required to acquire a huge number of shares. ITC’s offer to buy a stake in VST Industries received approval from SEBI.
On the other hand, Damani’s approval was delayed due to his possible involvement in the stock market crash a few months earlier. Surprisingly, financial institutions too refused to side with Damani, though he offered a better price than ITC.
A little later, Damani’s open offer commenced, and it seemed like things started to work in his favour, until another problem came up. This time, it was VST Industries which troubled Damani. The company advanced its book closure date by a day and it was just before the last date of Damani’s open offer.
Book closure is a period when companies do not handle any requests to transfer shares. Meanwhile, an open offer is an offer made by an entity that is acquiring shares (in this case, Damani and ITC) to the shareholders of the target company (in this case, VST Industries).
Basically, even if people wanted to sell their shares to Damani, VST Industries did not handle requests. Damani and his investment banker alleged that this was a deliberate move to restrict investors from tendering their shares in the open offer.
Despite adversities, Damani managed to increase his stake in the company from 15% (held before the bidding started) to 20%. However, his desire to own a controlling stake in VST Industries remained unfulfilled.
Over the years, Damani continued to buy VST Industries’ shares and now has more than a 30% stake in it. The amount of dividend that he has received from the company for the shares that he holds, is more than twice the amount that he had invested to acquire those shares. At the time of writing this article, VST Industries’ share price was around ₹3,800 apiece, indicating that the stock has delivered massive returns over the years.
When companies are attractive for making investments and garner the attention of seasoned investors, it usually leads to bidding wars. Even if they are undervalued, bidding leads to an escalation in their share price. Which bidding war have you heard about?