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Case Study NIM IPO

Case Study NIM IPO

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Published by: Aniruddha Ghosh on Jan 03, 2012
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 IPO CRISIS OF NUZIVEEDU SEEDS
Amid volatile market conditions, the country's largest seed company Nuziveedu Seeds (NSL Seeds) has begunthe process of entering the capital markets to raise around Rs 900 crores. The Hyderabad-based seed producer has appointed five investment banks for the proposed initial public issue due to be launched early next fiscal,said two top officials involved in the issue. "The company is planning to do a combination of fresh issue aswell as secondary sale early next fiscal," said one of the officials. Among the leading bankers appointed for the proposed issue are Goldman Sachs, JP Morgan, JM Financial and ENAM Securities. An email sent to NSLSeeds did not elicit any response. The company, which is a strong player in cotton seeds, is planning to developand market seeds of crops that include corn, rice and vegetable hybrids, the other official said. Private equitymajor Blackstone had invested around Rs 250 crores in the company in 2008 by way of convertible instruments.Depending upon the conversion price, Blackstone will have 10-20% equity stake in the company, the second person said. "Blackstone's investment will be converted sometime in the next quarter," the second official said.But it is not clear whether Blackstone plans to sell its stake in the proposed IPO. There are chances thatBlackstone may exit through the IPO, the official added. The NSL group is a diversified group that has a presence in textiles, sugar, wind energy and infrastructure. It enjoys the largest market share for hybrid cottonseeds in India and serves as a link between cotton farming and the textile industry. The company, which hadreported a turnover of about Rs 750 crores in the previous fiscal, is expected to increase revenue to Rs 900crores in 2011-12. The operating profit/EBITDA is estimated to touch Rs 400 crores in 2011-12 up from aboutRs 350 crores in the last fiscal. The sluggish market conditions over the past few months have impacted a hostof IPOs severely. As many as 25 companies have called-off their IPOs so far this calendar year, as per onlinestock broker SMC Global Securities. The amount that these 25 companies were planning to raise from thecapital market was about of Rs 31,000 crore. While all these 25 firms had valid SEBI approval for their IPOs,they couldn't open their IPOs within the validity period of one year from the date of SEBI approval.Questions:a)
 
What kind of issue is talked in this case and how many types of issue are there in Indian market? b)
 
Is there any better method to issue the stock of NSL group other than the methods prescribed, if any please suggest with facts and figures?c)
 
If there had been a rights issue in the ratio of (2:1), would NSL got approval from SEBI and ROC? Givereasons for your answer?d)
 
Since the NSL Group appointed five investment banks for the issue, what job they would do for thecompany?e)
 
How many merchant bankers will be required in this case?f)
 
³25 companies to call-off their IPO due to volatile market conditions.´- In your opinion what can be thereasons for the above anomaly. (Your answer must be in context of the current stock market condition prevailing in the Indian Economy.)g)
 
What do you mean by private equity? Enumerate the various features of Private Equity firm? Also statethe reasons why a firm like Blackstone does not go for IPO but goes for Private Equity?
(Adapted from: Economic Times newspaper dated as on 30/11/2011)
 
 
Example of Private Equity Firm:
A private equity fund, ABC Capital II, borrows $9bn from a bank (or other lender). To this it adds $2bn of 
equity
± money from its own partners and from
limited partners
(pension funds, rich individuals, etc.). With this$11bn it buys all the shares of an underperforming company, XYZ Industrial (after 
due diligence
, i.e. checkingthe books). It replaces the senior management in XYZ Industrial, and they set out to streamline it. Theworkforce is reduced; some assets are sold off, etc. The objective is to increase the value of the company for afast sale. The stock market is experiencing a bull market, and XYZ Industrial is sold two years after the buy-outfor $13bn, yielding a profit of $2bn. The original loan can now be paid off with interest of say $0.5bn. Theremaining profit of $1.5bn is shared among the partners. Taxation of such gains is often minimal. Note that partof that profit results from turning the company round, and part results from the general increase in share pricesin a buoyant stock market, the latter often being the greater component. Notes:
y
 
The lenders (the people who put up the $11bn in the example) can insure their loans against default, at acost, by selling credit derivatives; including credit default swaps (CDSs) and collateralized loanobligations (CLOs), to other institutions, such as hedge funds.
y
 
Often the loan/equity ($11bn above) is not paid off after sale but left on the books of the company (XYZIndustrial) for it to pay off over time. This can be advantageous since the interest is typically off-settableagainst the profits of the company, thus reducing, or even eliminating, tax.
T
op 5 Advantages of Private Equity
Investing in a private equity fund has a lot of advantages compared to other investment areas; here are just fiveadvantages of private equity for not only investors but also the companies that private equity firms acquire:1.
 
Companies that are backed or acquired by private equity firms are often made more efficient and produce higher profits, which benefits now only the private equity firm but also the company. Privateequity firms use skilled management teams to correct the problems and ineffective parts of the companyand many times this intervention prevents the company from further declining or even failing.2.
 
The management receives carried interest, a portion of the profits, so managers and their staff aremotivated to produce good results to investors. Although carried interest is often criticized for takingmoney from the investors, it is a very big incentive for managers.3.
 
By definition, private equity firms work outside the public eye and do not have to follow the sametransparency standards that public firms and funds must adhere to. This allows private equity firms toreform the companies without the constraint of having to report quarterly to the SEBI or ROC or similar distractions.4.
 
Private equity firms generally perform very rigorous due diligence on potential investments. By utilizinga team of researchers the private equity firm is able to identify most risks that would not otherwise befound.5.
 
Private equity managers are paid very well and so it is easy to attract high caliber, experienced managersthat tend to perform very well. The same goes for lower level employees at private equity firms, theytend to be the top young business school graduates.
 
 
Wh
at Does
 Secondary Offering 
Mean?
1.
 
The issuance of new stock for public sale from a company that has already made its initial public offering(IPO). Usually, these kinds of public offerings are made by companies wishing to refinance, or raisecapital for growth. Money raised from these kinds of secondary offerings goes to the company, throughthe investment bank that underwrites the offering. Investment banks are issued an allotment, and possiblyan overallotment which they may choose to exercise if there is a strong possibility of making money onthe spread between the allotment price and the selling price of the securities.
2
.
 
A sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds of this sale are paid to the stockholders that sell their shares. Often, thecompany that issued the shares holds a large percentage of the stocks it issues.
Wh
 y do s
h
are prices fall after a company
h
as a secondary offering?
The best way to answer this question is to provide a simple illustration of what happens when a companyincreases the number of shares issued, or shares outstanding, through asecondary offering. Let's start from the  beginning. A company goes public with aninitial public offering(IPO) of stock. In our example, XYZ Inc. hasa successful IPO and raises $1 million by issuing 100,000 shares. These are purchased by a few dozen investorswho are now the owners (shareholders) of the company. In the first full year of operations, XYZ produces anetincomeof $100,000. One of the ways the investment community measures a company's profitability is based onearnings per share(EPS), which allows for a more meaningful comparison of corporate figures. So, in its firstyear of public ownership, XYZ had an EPS of $1 ($100,000 of net income / 100,000 shares outstanding). Inother words, each share of XYZ stock held by a shareholder was worth $1 of earnings. Subsequently, things arelooking up for XYZ, which prompts management to raise more equity capital through a secondary offering,which is successful. In this instance, the company only issues 50,000 shares; this produces additional equity of $50,000. The company then goes on to have another good year with a net income of $125,000. That's the goodnews, at least for the company. However, when viewed from the point of view of the original investors - thosewho became shareholders through the IPO - their level of ownership has been decreased with the increase in theshareholder base. This consequence is referred to as thedilutionof their ownership percentage. Some simplemath will illustrate this event. In the second year, XYZ had 150,000 shares outstanding: 100,000 from the IPOand 50,000 from the secondary offering. These shares have a claim on $125,000 of earnings (net income), or earnings per share of $0.83 ($125,000 of net income / 150,000 shares outstanding), which comparesunfavorably to the $1 EPS from the previous year. In other words, the EPS value of the initial shareholders'ownership decreases by 17%! While an absolute increase in a company's net income is a welcome sight,investors focus on what each share of their investment is producing. An increase in a company's capital basedilutes the company's earnings because they are spread among a greater number of shareholders. Without astrong case for maintaining and/or boosting EPS, investor sentiment for a stock that is subject to a potentialdilutive effect will be negative. Although it is not automatic, the prospect of share dilution will generally hurt acompany's stock price.The Primary and Secondary designations refer only to how the shares were purchased. More specifically, purchasing ³Primary´ shares means you are buying the shares directly from the Company and the proceedsfrom the stock sale go to the Company. If you purchase ³Secondary´ shares you are buying stock from anexisting shareholder instead of directly from the Company. The shares being purchased on a ³Secondary´ basiswere at some point in the past sold as ³Primary´ shares by the Company. Primary shares are sold by theCompany in a variety of situations. This first occurs when the founders of the business purchase their founders

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