Katalyst wealth (alpha plus) Risk Arbitrage special opportunities investment operations

Katalyst Wealth – Risk Arbitrage/Special Opportunities Investment Operations

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Katalyst Wealth – Risk Arbitrage/Special Opportunities Investment Operations

Content Index

• What are Risk arbitrage/Special situations – Slide #3

• Investment Operations in Weizmann Ltd – Slide #5

• Investment Operations in TCI Ltd – Slide #7

• Investment Operations in Investment & Precision Castings Ltd – Slide #9• Investment Operations in Investment & Precision Castings Ltd – Slide #9

• Investment Operations in ZEE News Ltd – Slide #11

• Investment Operations in NTC Industries (Earlier RDB Industries) – Slide #13

• Investment Operations in Kesar Enterprises Ltd – Slide #15


What are Risk arbitrage/Special situations

Dear Readers,

In his paper, Prof Zeckhauser states, “Most investors – who’s training, if any, fits a world where states andprobabilities are assumed known – have little idea of how to deal with the unknowable. When they recognize itspresence, they tend to steer clear.

However, unknowable situations have been and will be associated with remarkably powerful investment returns…Indeed, we would speculate that the major fortunes in finance have been made by people who are effective indealing with the unknown and unknowable. This will probably be truer still in the future.”

Risk Arbitrage/Special situations

Arbitrage (sometimes called “risk arbitrage”) is a special type of investment operation that is meant to generateprofit with little or no risk. By taking advantage of special situations that arise in the security markets from time totime, an investor can exploit price discrepancies created by special situations, increasing his net worth regardless ofwhether the market itself advances. Risk arbitrage opportunities arise out of announced corporate transactionssuch as takeovers, mergers, de-mergers, special dividends, share buybacks, and bankruptcy restructurings.

On the whole, risk arbitrage can be a source of steady and dependable profits over long periods of time. It is theresponsibility of the investor to exercise sound judgment and decide at what time and in what amount he is willingto engage in these types of operations. Many institutional investors set aside a portion of their portfolio (ten ortwenty percent, for example) that is dedicated to arbitrage commitments, special opportunities, liquidations andother specialized investing practices.


Investment Operations in Various De-merger opportunities


Investment Operations in Weizmann Ltd

On 26th Mar’10, Weizmann Ltd (BSE Scrip Code 523011) informed BSE that the Board of Directors of the Company atits meeting considered and approved the Scheme of Arrangement (SOA) in between its wholly owned subsidiariesand partially owned subsidiaries (This was a slightly complex case involving many subsidiaries and their mergers andde-mergers)

BSE Link - http://www.bseindia.com/qresann/news.asp?newsid={8BEA9C6C-B8B5-4DB5-9C66-EF399BF98747}

At the time of announcement by the company on 26th Mar’10, the stock was trading at Rs 34/- per share howeverwe waited for the shareholders to approve the scheme of arrangement as directed from the High court. (In De-merger operations, first an approval of Shareholders and creditors is sought and once they approve the same, it’s

A complex case of Mergers & De-mergers

merger operations, first an approval of Shareholders and creditors is sought and once they approve the same, it’sleft to the High Court to approve the same).

Starting Oct'10 (In such cases, one has to keep a tab on the proceedings in order to grab the opportunity), westarted buying from BSE. We were in constant touch with the company and knew that the High court is about toapprove the De-merger. We could buy the shares of Weizmann Ltd at an average price of Rs 66/- per share in themonth of Oct'10. The High court approved the Scheme of Arrangement on 3rd Nov'10 while the ex-date fordemerger was fixed as 8th Dec’10. We sold off all the Weizmann ltd shares on ex-date at Rs 25/- per share and thusgot entitled for the shares of Weizmann Forex and Karma Energy.

As per the SOA (refer the above link) for every 1000 shares (1000 stated for the purpose of ease of calculation) ofWeizmann bought at 66, we received 667 shares of Weizmann Forex and 667 shares of Karma energy.


Investment Operations in Weizmann Ltd

Thus the combined cost of investment came at Rs 30.73/- per share for every share of {66*1000-25*1000 = 41000.41000/(667+667) = Rs 30.73} Weizmann Forex and Karma Energy each.

As per our approximate valuations the Karma Energy Ltd should have opened at Rs 15/- per share on listing dateand Weizmann Forex Ltd should have listed at Rs 100/- per share. Going fast forward, on 28th Jun’11, Karma energywas trading at Rs 24/share on listing date and we could manage to sell it on an average of Rs 23 on the same day.

On the other hand Weizmann Forex listed at Rs 62. We decided to hold on Weizmann Forex because we sawimmense value in the company and waited for Rs 100/- per share. Next week Weizmann Forex touched a high of Rs97. We sold all our shares at an average of Rs 92/- per share.

Thus, we could manage an average price of Rs 57.5/- per share of Weizmann Forex and Karma Energy each whileThus, we could manage an average price of Rs 57.5/- per share of Weizmann Forex and Karma Energy each whileour cost of acquisition stood at Rs 30.73/- per share (refer previous slide).


Start of Investment Operations Oct’10

Cost of acquisition of each share of Weizmann Forex and Karma energy Rs 30.73

Average Selling price for each share of Weizmann Forex & Karma energy Rs 57.50

Month of closure of Investment operations Jun’11

Time period of Investment operation in Weizmann Ltd 8 Months

Absolute Return 87.11%

Annualized Return 130.66%

Investment Operations in TCI Ltd

On 17th Mar’10, Transport Corporation of India Ltd (TCI) informed BSE that the Board of Directors of the Company atits meeting considered and approved the Scheme of Arrangement (SOA) relating to the demerger of "Real Estate &Warehousing" division of the Company into a separate company by the name of TCI Developers.

BSE Link - http://www.bseindia.com/qresann/news.asp?newsid={AD3E0289-5E86-4E61-A11B-99AF82962628}

As per the SOA, the existing Shareholders of TCI would have received 1 (one) equity share each in the TransfereeCompany i.e. TCI Developers Ltd. (TDL) against every 20 equity shares held by them in the Company TCI Ltd.

Land Value unlocked

Company i.e. TCI Developers Ltd. (TDL) against every 20 equity shares held by them in the Company TCI Ltd.

On 29th Jun'10 the shareholders approved SOA, while on 5th Oct’10 the honorable High Court approved thedemerger.

We were not expecting the record date and approval from high court to come so fast and we bought shares onlyafter approval from High court but 15 days before the record date (Record date is a date on which a company looksto see who it’s shareholders are and thus ensures that dividend checks, bonus issues, etc get sent to the rightpeople.)


Investment Operations in TCI Ltd

We bought 1000 shares of TCI at an average purchase price of Rs 144/- per share and sold them off after the ex-dateat Rs 134/- per share.

As per the SOA, we received 50 shares of TCI developers at a cost of Rs 200/- per share (144*1000 – 134*1000 =10000. 10000/50 = Rs 200). The shares of TCI developers got listed on 19th Apr’11, which were trading on anaverage price of Rs 300 and we could manage to sell them off for Rs 301/- per share.

In 6 months we could thus manage a pre-tax profit of 50% in the falling markets.




Cost of acquisition of each share of TCI Developers Rs 200

Average Selling price for each share of TCI Developers Rs 301

Month of closure of Investment operations Apr’11

Time Period of investment operation in TCI Ltd 6 Months


Annualized Return 101%

Investment Operation in Investment & Precision Castings Ltd

On 3rd Jul’08, Investment & Precision Castings Ltd informed BSE that the company will be holding a meeting on 31st

Jul’08 to obtain the consent of the equity shareholders and unsecured creditors, with or without modification, ofthe Scheme of Arrangement and Demerger between the Company i.e. Investment & Precision Castings Ltd andTamboli Capital Ltd.

BSE LINK - http://www.bseindia.com/qresann/news.asp?newsid={D7232638-4870-4086-A879-7D351F86D8AE}

Meanwhile, Investment & Precision Castings Ltd informed BSE that CRISIL assigned its ratings to BBB+/STABLE/P2 tothe various bank facilities of the Company.

Highest Return in Shortest duration

the various bank facilities of the Company.

The ratings reflected company's established presence in the investment casting business, healthy operationalefficiency, and strong financial risk profile.

On 25th Feb’09 Investment & Precision Castings Ltd informed BSE that the Board of Directors of the Company havedetermined March 20, 2009 as the Record Date. The swap ratio fixed by the Board is as below:

2 New Equity Shares of Tamboli Capital Ltd for every 1 share of Investment and Precision Castings held by theshareholders of the Company.


Investment Operation in Investment & Precision Castings Ltd

During Feb’09, we were running through one of the worst phases of the Indian market; however we bought 1000shares of Investment and Precision Castings Ltd at Rs 40/- per share in Feb'09 and sold on the ex-date at Rs 33/- pershare.

As per the SOA, we received 2000 shares of Tamboli Capital at a cost of Rs 3.5/- per share (40*1000 – 33*1000 =7000. 7000/2000 = Rs 3.5).

Going fast forward, we could not believe our luck when Tamboli Capital got listed 1 year later (The listing ofTransferee company does get delayed at times) in the raging bull market on 15th Mar’10. The stock traded on hugevolumes at Rs 45/- per share. The luck was on our side because the auto cycle was booming, and we could thus sellour shares at an average price of Rs 45/- per share. We never expected such kind or returns when we started withthe investment operations in Feb’09 as the markets were engulfed by one of the worst bear markets.our shares at an average price of Rs 45/- per share. We never expected such kind or returns when we started withthe investment operations in Feb’09 as the markets were engulfed by one of the worst bear markets.


Start of Investment Operations Feb’09

Cost of acquisition of each share of Tamboli Capital Rs 3.5

Average Selling price for each share of Tamboli Capital Rs 45

Month of closure of Investment operations Mar’10

Time Period of investment operation in Investment and Precision Ltd 13 Months



Investment Operations in ZEE News Ltd

On 29th Oct’09, Zee News Ltd informed BSE that the Board of Directors of the Company approved the Scheme ofArrangement for transfer / demerger of Regional General Entertainment Business undertaking into ZeeEntertainment Enterprises Ltd. (ZEEL).

In consideration for the said demerger, the Board also approved swap ratio of 4 equity shares to be issued by ZEELto the shareholders of the ZEE News Ltd for every 19 equity shares of the Company ZEE News held by them as onthe record date.

BSE LINK - http://www.bseindia.com/qresann/news.asp?newsid={F712ED9D-7930-426E-BA90-C8D8C8E78ECB}

Easy Arbitrage

On 30th Mar’10, the company fixed 16th Apr’10 as the Record date. Usually with bigger companies, the boardapproval, shareholders approval and High Court approval are obtained soon and thus one needs to monitor theirproceedings closely.

We had started buying shares of Zee News Ltd in Mar’10 and could buy the shares at an average price of Rs 60/- pershare, thus 190 (190 used for ease of calculation) shares cost us Rs 11400. We sold all the shares of Zee News on ex-date at Rs 18/- per share.

Thus Zee Entertainment Enterprises Ltd shares cost us Rs 199.5/- per share (60*190 – 18*190 = 7980. 7980/40 =199.5).


Investment Operations in ZEE News Ltd

Zee Entertainment Enterprises ltd. is also listed in F&O space. We went short on Zee entertainment at Rs 288/- inFutures and thus locked in our profits in order to avoid any market related risks.

When we got the shares of Zee Entertainment Enterprises ltd in 22 days, the price was Rs 305/- per share and wesold of all our shares in the cash market at Rs 305/- per share, however we had already locked in our profits at Rs288/- per share by going short in Futures.

For cases where the shares of Transferee company are already listed and also listed in F&O, it’s always better to lockin profits by going short in Futures.


Start of Investment Operations Mar’10

Cost of acquisition of each share of Zee Entertainment Enterprises Ltd Rs 199.5

Average Selling price for each share of Zee Entertainment Enterprises Ltd Rs 288

Month of closure of Investment operations Apr’10

Time Period of investment operation in ZEE News Ltd 1 Month



Investment Operations in NTC Industries Ltd

On 10th Oct’09 RDB Industries (now renamed as NTC Industries Ltd) informed BSE that the Meeting of the holders ofEquity Shares of the Company will be held on October 28, 2009, for the purpose of considering and approving thescheme of arrangement ('the Scheme') proposed to be made between the RDB Industries Ltd and RDB Realty &Infrastructure Ltd. and their respective Equity Shareholders.

As per the proposed SOA the realty division of RDB Industries Ltd. was to be hived off to RDB Realty & InfrastructureLtd. and the shareholders of the Company would have received one equity share of Demerged Company RDB Realty& Infrastructure Ltd. against 1 (one) equity shares presently held by them in RDB Industries Ltd.

BSE LINK - http://www.bseindia.com/qresann/news.asp?newsid={FBA53235-3560-40A6-8523-F91AD4DB64B4}

Extraordinary Returns

BSE LINK - http://www.bseindia.com/qresann/news.asp?newsid={FBA53235-3560-40A6-8523-F91AD4DB64B4}

We started buying the shares of RDB Industries in Feb’10 (now NTC Industries Ltd) and could buy the shares at anaverage price of Rs 130/- per share.

Next month, the stock price came down to Rs 110/- per share on account of delay in approval by the honorable HighCourt, however we didn’t sell any share.

The High Court finally approved the SOA on 12th Apr’10, while the Record date was eventually fixed as 23rd Jun’10.We were able to sell RDB Industries at an average price of Rs 118/- per share on the ex-date.


Investment Operations in NTC Industries Ltd

Thus RDB Realty & Infrastructure Ltd shares cost us Rs 12/- per share (130*1000 – 118*1000 = 12000. 12000/1000 =Rs 12).

RDB realty eventually got listed on 13th Dec’10. We could manage to sell off all our shares on the listing date at Rs88/- per share.

The returns were extraordinary in this case though beyond our expectations as the realty index was down and wewere not expecting RDB Realty to list at such a good price. But at the same time market always surprises.

Investment operations in Demerger cases deliver the best returns if performed in bear market and de-mergedshares get listed in the bull market. Since this feature is not in our hand and we can only focus on value creation andshares get listed in the bull market. Since this feature is not in our hand and we can only focus on value creation andvalue unlocking from the demerger cases.



Cost of acquisition of each share of RDB Realty & Infrastructure Rs 12

Average Selling price for each share of RDB Realty and infrastructure Rs 88

Month of closure of Investment operations Dec’10

Time period of Investment operation in RDB Industries 10 months



Investment Operations in Kesar Enterprises Ltd

On 22nd Jan’09, Kesar Enterprises Ltd informed BSE that the Board of Directors approved The Scheme ofArrangement of Demerging the Storage Undertaking / Division of the Company into Kesar Terminals &Infrastructure Ltd. (KTIL).

As per the Scheme of Arrangement of Demerger, it was proposed to allot 7 Equity Shares each of KTIL for every 10fully paid up Equity Shares of Kesar Enterprises held by the Shareholders of the Company.

BSE LINK - http://www.bseindia.com/qresann/news.asp?newsid={746DA879-AE03-4B75-A5E2-C0538126D690}

In Kesar Terminals we saw immense value so did we in Kesar enterprises as the sugar prices were very high at that

Investment Operation that didn’t go as per the expectations

In Kesar Terminals we saw immense value so did we in Kesar enterprises as the sugar prices were very high at thatpoint of time. This demerger took a long time for approvals from Shareholders and thereafter from High Court, sowe decided to wait before starting with investment operations.

In Feb ’10 we noticed promoter’s making open market purchases in Kesar enterprises and we therefore spoke withthe Company Secretary of Kesar enterprises (Got assurance that approval from the High Court isn't far).

We started with our investment operations and could manage our purchases at an average price of Rs 120/- pershare of Kesar Enterprises. On 12 Mar’10 the SOA was eventually approved by the High Court and the record datewas fixed as 14th May’10.


Investment Operations in Kesar Enterprises Ltd

In the mean time from Feb’10 to May’10 the sugar cycle suddenly collapsed. We still decided to hold on Kesarenterprises and sold it on ex date. We sold our 1000 shares on ex-date at Rs 60/- per share.

Each Kesar terminals stock cost us Rs 85.71 (120*1000 – 60*1000 = 60000. 60000/700 = Rs 85.71). We wereexpecting the listing within 6 months. The shares got listed at Rs 95/- per share on 22nd Dec’10.

Market scenario had changed in the meantime and we had to sell our shares at Rs 95/- per share. It was a profitableinvestment operation for us but we missed out on lot of other opportunities and thus incurred an opportunity costbecause from Feb’10 to Nov'10 it was a raging bull market in India and we would have been better off investing ingood businesses.good businesses.



Cost of acquisition of each share of Kesar Terminals & Infrastructure Rs 85.71

Average Selling price for each share of Kesar Terminals & Infrastructure Rs 95.00

Month of closure of Investment operations Dec’10

Time Period of investment operations in Kesar Enterprises 10 Months



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Katalyst wealth (alpha plus) Risk Arbitrage special opportunities investment operations

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