Valuation Insights - Control Premium
The Central Government is planning to disinvest many companies & set a target to garner Rs. 65,000 Crore from divestment in FY2022-23. As per the latest event happening, wherein the government wants a control premium to part with its holding in IDBI bank and is likely to retain a partial stake even after the transfer of management control, as it prepares for the lender’s divestment. This is because the weighted average cost of acquisition of the government’s current shareholding in the bank is much higher than the prevailing market value of its shares.
Based on the closing price as on 1st August 2022, the government holds 45.48% stake & LIC owns 49.24% in IDBI bank. The government may look to sell around 26% stake in the IDBI Bank, along with management control to attract investors.
This piece intends to provide an insight of the Control Premium, how it is determined and the precedents, where this has been applied.
What is Control Premium?
A control premium is an amount that a buyer is sometimes willing to pay over a publicly traded company's current market price to acquire a controlling share in that company. Acquiring a controlling number of shares sometimes requires, offering a premium over the current market price per share to induce existing shareholders to sell.
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It helps to complete the acquisition before more competitors enter the deal.
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It helps acquire the controlling interest.
The size of the premium is influenced by several factors, such as
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The potential for increasing the value of the target
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Competition from other buyers
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The current stockholders' views and financial needs.
If the investor buys at least 51% of the target’s stocks at a control premium, they get the power to direct the business in any way they see fit. On the other hand, if the acquirer buys 35% of a business with multiple shareholders, it may not get outright control but enjoys a better opportunity to command control over the other investors.
Control premiums are popular during takeover bids, where large companies acquire a large number of shares in order to gain ownership control of the target. Typically, control premiums can be in the 20%-30% range of the target’s current share price and can sometimes go up to 70%.
Premiums tend to be higher in strategic deals (one company acquiring another company) as opposed to financial deals (a private equity firm acquiring a company). That’s because a strategic acquirer often gains cost savings (synergies) from the newly combined firm increases how much it can afford to pay.
How Control Premium is calculated?
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For Non-listed companies: - Based on the past actual transactions, differences between prices at which publicly traded companies are acquired and the pre-acquisition announcement prices of the same stock.
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For listed companies: - Accordingly, the average 2-week and 26-week prices before the public announcement of the offer can be considered as the “base price”.
Transactions in news with Control Premium paid:
Kraft acquired Cadbury:
In January 2010, Kraft Foods made its offer to buy Cadbury for around £11.9 billion which included an increased offer to 840 pence per share plus a special 10 pence per share dividend. To get a hold of the company Kraft had to premium of approximately 12.75% over their initial offer bid of 745.
Cadbury products are sold by the largest retail chain in India, enabling Kraft to reach 92% of the population of India. The acquisition of Cadbury means that Kraft products can enter India and other rapidly developing countries directly.
Disney-Marvel Acquisition:
On August 31, 2009, The Walt Disney Company announced a deal to acquire Marvel Entertainment for $4 billion, with Marvel shareholders to receive $30 and approximately 0.745 Disney shares for each share of Marvel they own. The voting occurred on December 31, 2009, and the merger was approved. The acquisition of Marvel was finalized hours after the shareholder vote, therefore giving Disney full ownership of Marvel Entertainment
Disney acquired Marvel Entertainment by paying 30% control premium above Marvel’s traded share price. Disney believed it could create greater value with Marvel’s existing brand by bringing them under its own umbrella.
Indian Cements Limited bid for Raasi Cements Limited:
In February 1998, India Cements Limited (“ICL”), bid for Raasi Cements Limited (“RCL”), and made an open offer for 20 percent of RCL’s shares at Rs. 300 per share when RCL’s share price was at Rs. 100 on the stock exchange. Financial Institutions also held a considerable stake in RCL, and so a protracted battle ensued between ICL, RCL and the Financial Institutions. During the term of the public offer, the promoter of RCL reached a deal to sell his 32 percent stake to ICL at a price which was lower than the open offer price. Subsequently, ICL also bought out the Financial Institutions in an open offer and increased their stake in RCL to 85 percent.
ICL vs RCL is to date considered to be one of the most aggressive hostile takeovers to date. A 2x or 200% premium on exchange quoted price of INR 100.
Intel-McAfee Acquisition:
Aug. 19, 2010 – Intel Corporation has entered into a definitive agreement to acquire McAfee, Inc., through the purchase of all of the company’s common stock at $48 per share in cash, for approximately $7.68 billion. Both boards of directors have unanimously approved the deal, which is expected to close after McAfee shareholder approval, regulatory clearances and other customary conditions specified in the agreement.
Intel paid a premium of 62% over McAfee’s previous day’s close. Over the prior 12 months before the deal, McAfee’s share prices had suffered a significant drop in April and May of 2010 due to millions of computers being affected by an erroneous virus definition. When Intel first made an offer, it was barely 5% higher than McAfee’s 52-week share price high.