The fierce battle between Reliance Mediaworks Ltd (RML) and Inox Leisure Ltd (Inox) to buy Fame India Ltd has turned the multiplex industry into a battleground. Although RML has said that its open offer to buy additional 52.72% stake in Fame has been delayed pending approval from market regulator Securities and Exchange Board of India (SEBI), there are some other aspects that could impact the final outcome of the deal.
One issue relates to the foreign currency convertible bonds (FCCBs) issued by Fame in 2006 and the second issue is the stake owned by some inconspicuous parties, which could turn the balance either towards Inox or RML.
At present, three companies of the Anil Dhirubhai Ambani Group (ADAG)—RML, Reliance Capital Ltd and Reliance Capital Partners—hold a combined 13.79% stake in Fame. Inox holds 50.48% stake in Fame, including the 43.3% share that it had bought from South Yarra Holdings for Rs67 crore. As of end-December 2009, Gulshan Investment Co Ltd (Gulshan) and Shail Investments Pvt Ltd (Shail) held 6.54% and 5.26% stake, respectively, in Fame. On 25 March 2010, Religare Securities Ltd (Religare) increased its stake to 5.82% from 0.7% in Fame. Since Religare is a broker, shares are held in the ordinary course of business towards margin or collateral on behalf of clients.
In April 2006, Fame issued two series of FCCBs, the 12,000 ‘Series A Bonds’ and 8,000 ‘Series B Bonds’, of face value of $1,000 each, aggregating to $20 million. The FCCBs are convertible at any time up to 12 April 2011 at the option of the holders into newly issued shares with a face value of Rs10 per share at an initial conversion price of Rs90 per share for ‘Series A Bonds’ and Rs107 per share for ‘Series B Bonds’.
The only condition before these FCCBs get converted into shares is that the stock price has to be higher that the conversion price. During 2007-08, out of the total $20 million FCCBs issued, about 3,000 ‘Series A Bonds’ and 4,000 ‘Series B Bonds’—together worth $7 million—have already been converted into shares. That leaves FCCBs worth $13 million which are outstanding, which may hold the key to Fame for both RML and Inox.
In case Fame’s share price goes above Rs90 and Rs107, then it will lead to conversion of FCCBs—from both series—into shares and reduce Inox's stake in Fame to 42.67%. Upon conversion, FCCB holders may have around 15.07% stake in Fame. This together with the stake of Gulshan, Shail and Religare will play a crucial role in determining the winner in this race.
ADAG companies are shopping for Fame’s shares through open market deals, thereby increasing the group’s stake to 13.79% as of 8th March from the level of 4.65% before 5th February.
However, even after the FCCB conversion, Inox would hold about 42.67% and thus can easily buy additional 8% stake in Fame from the markets.
With Fame share prices now touching Rs90 and above, purchase of even a single share of Fame will considerably hike the Inox offer price. This may also lead to a situation like that of the Great Offshore Ltd (GOL) takeover battle, where ABG Shipyard Ltd sold its stake in GOL just one day prior to the open offer and made huge profits.
Now, the moot question is, why are both Inox and ADAG fighting for Fame? The answer is simple. Fame owns 95 screens across 12 cities. ADAG wants to consolidate its position as the market leader in number of screens (to 337 screens from 242 screens). Similarly, after the acquisition, the number of screens for Inox would go up to 210 from 115, thus making it the second-largest player in the film-exhibition business.
Apart from the rankings and consolidation, there is another crucial aspect to the acquisition of Fame. The acquisition doesn't just involve the film-exhibition business of Fame, but it brings along Fame's film distribution subsidiary, Shringar Films Ltd, and food courts and restaurant management subsidiary, Big Pictures Hospitality Services Pvt Ltd.
Fame also holds a 50% stake in Headstrong Films Pvt Ltd (a film-production unit) and Swanston Multiplex Cinemas Pvt Ltd (primarily engaged in managing a multiplex in a Mumbai suburb), thus making the acquisition deal a complete package.
With both the parties trying to become market leaders in this business, the battle is bound to heat up in the future. Amidst this scuffle, the debt of over Rs100 crore on Fame's account books seems to have taken a backseat.
On Thursday, Fame India ended 0.06% down at Rs85; Inox surged 5.18% to Rs66.05 and RML shares inched up 1.04% to Rs218.40 on the Bombay Stock Exchange. The BSE 30-share Sensex closed 164.9 points up at 17,692.60 points. — Yogesh Sapkale