Tata Consultancy Services Limited – Tender Offer

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SUMMARY
POTENTIAL BUYBACK ANNOUNCEMENT
On June 12, 2018, Tata Consultancy Services Limited (NSEI:TCS) announced that it intends to initiate an equity buyback on June 15, 2018. The Company’s Board of Directors will consider a share repurchase program under which, the company will buyback its own shares.

Share Price = INR 1781.00

At the time of potential buyback announcement, the terms of buyback i.e. mode of buyback (tender offer vs. open market repurchase), buyback price and size of buyback are unknown. However, we note that Tata Consultancy Services Limited purchased shares through tender offer route 1 time in the past, so likelihood of a tender offer is higher.

TENDER OFFER ANNOUNCEMENT
On June 15, 2018, Tata Consultancy Services Limited (NSEI:TCS) announced a tender offer to buyback 76.19 million shares at a buyback price of ₹ 2100.00 per share. This represents a spread of 14.1% over the market price of ₹ 1840.05 per share, as of the announcement date. The proposed buyback shares represents 1.99% of the total outstanding shares of 3828.58 million. Given SEBI’s rule of preference to small shareholders who own less than ₹ 0.2 million worth of shares of the Company, approximately 11.43 million shares are reserved for small shareholders, which represents 15% of the proposed buyback.

Features – Tender Offer – Fixed Price
Share Price = INR 1840.05
Buyback Price = INR 2100.00
Spread = 14.1%
Buyback Size = 2.0% or 76.19 million shares

RECORD DATE ANNOUNCEMENT
The Company has fixed the record date of August 18, 2018 for the purpose of determining the entitlement and the names of equity shareholders who are eligible to participate in the buyback.

BUYBACK DATES ANNOUNCEMENT
The Company has announced the buyback open and close dates to participate in this tender offer. The buyback window for putting instructions opens on September 6, 2018 and closes on September 21, 2018.

RISK-REWARD ANALYSIS
ANALYSIS AS OF TENDER OFFER ANNOUNCEMENT DATE
Share Price = INR 1840.05

Based on our research and analysis, the acceptance rate of this tender offer for small shareholders is expected to fall in the 15%-50% range. At the current price level, this represents an expected return between 2.1% and 7.1%. If the share price drops by 5%, the expected return would be between -2.1% and 4.6%. If the share price increases by 5%, the expected return would be between 6.4% and 9.6%. At 100% acceptance rate, the maximum return would be around 14.1%.
Based on the above risk-reward ratio analysis, Tata Consultancy Services Limited tender offer appears to be an attractive low-risk arbitrage opportunity for small shareholders.

CONCLUSION = INVEST

ANALYSIS AS OF 3 DAYS PRIOR TO RECORD DATE
Share Price = INR 2003.55

At the current price level and above mentioned acceptance rates, an expected return is between 0.7% and 2.4%. If the share price drops by 5%, the expected return would be between -3.5% and -0.1%. If the share price increases by 5%, the expected return would be between 4.9% and 5.0%. At 100% acceptance rate, the maximum return would be around 4.8%.
Based on the above risk-reward ratio analysis, Tata Consultancy Services Limited tender offer doesn’t appear to be an attractive low-risk arbitrage opportunity for small shareholders anymore.

CONCLUSION = CLOSE

ANALYSIS AS OF BUYBACK OPEN DATE
Share Price = INR 2075.30

Given we decided to INVEST at the time of announcement and decided to CLOSE at the time of record date, there is no point to participate in this tender offer anymore.

CONCLUSION = NOT PARTICIPATE

POST-BUYBACK ANNOUNCEMENT & RESULT
On September 21, 2018, Tata Consultancy Services Limited (NSEI:TCS) announced the final results of the buyback. A total of 4.02 million shares were tendered by small shareholders, out of which 4.02 million shares were accepted. Therefore, the actual acceptance rate for small shareholders turned out to be approximately 100%. The share price increased by 14.3% since tender offer announcement, which includes 9.4% increase between the tender offer announcement and record date, and 4.9% increase between the record date and closing date. Further, the Company paid a dividend of INR 4.00 per share between the tender offer announcement and closing date, which implies a dividend yield of 0.2%.

Share Price = INR 2103.15

Given we decided to INVEST at the time of tender offer announcement, decided to CLOSE at the time of record date and decided to NOT PARTICIPATE at the time of buyback open date, the net realized return was 9.1% over a span of 61 days, which is equivalent to an annualized return of 68.4%.

RESULT = PROFIT
RETURN = 9.1%
DURATION = 61 days
ANNUALIZED IRR = 68.4%

REFERENCE LINKS/FILINGS
Potential Buyback Announcement
Tender Offer Announcement
Record Date Announcement
Buyback Dates Announcement
Post Buyback Announcement

DISCLAIMER & DISCLOSURE
The above post/article should not be considered as a stock recommendation or trading/investing advice in any way. The stock analysis is based on the information publicly available to author, however readers should check the original source of information. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion. At the time of writing this post author may have a financial interest or ownership in the discussed stock or initiate a position anytime in future.