Everonn's Varkey deal: A boost to investor confidence

On the face of it, the deal seems to be a winner for both sides: while Gems gets a good launchpad into the Indian education sector, Everonn gets a strategic investor.

FP Editors September 21, 2011 09:13:50 IST

What a remarkable change in fortunes for Everonn Education? A few weeks ago, investors were dumping the stock in panic after the company's managing director, P Kishore, was arrested on bribery and tax evasion charges. Even chairman J J Irani resigned over the scandal.

Then, on Tuesday, the company announced that it was selling a 12 percent stake to the Dubai-based Varkey group company, Gems Education, for about Rs 138 crore. Buoyed by the news, Everonn's shares closed 5 percent higher at Rs 367.15, after gaining over the past few trading sessions. The Varkey Group said it planned to buy the company's shares at Rs 528 per share - a 44 percent premium to Tuesday's closing price. Everonn said shares would be issued to the Dubai group through a preferential allotment.

Everonns Varkey deal A boost to investor confidence

The share of SKIL Infrastructure, a co-promoter of Everonn, will fall to 18.35 percent from 20.83 percent after the preferential allotment. Reuters

The deal has a few key implications for Everonn's investors: One, it is likely to trigger an open offer subject to regulatory approval. The Dubai-based company aims to acquire a 34-35 percent stake in Everonn and will, therefore, need to buy a little more than 20 percent of the shares from the open market.If Gems succeeds in acquiring a 20 percent stake through the open offer, it will become the largest shareholder in Everonn.

The share of SKIL Infrastructure, a co-promoter of Everonn, will fall to 18.35 percent from 20.83 percent after the preferential allotment. Media reports said SKIL has been hunting for a strategic investor ever since the company came under the public spotlight for the MD's evasion-of-tax charges and subsequent arrest. Eventually, Everonn will be managed by SKIL and the Varkey group. "The management control will be with the Varkey Group," said Nikhil Gandhi, non-executive director of Everonn. "However, the existing team will continue to work with the new management."

According to Sebi takeover guidelines, an 'open offer' is triggered in two situations: when an acquiring company buys 15 percent or more in a listed company or when there is a change in the management of a listed company. "Even though the percentage stake acquired (by the Varkey Group) is less than the prescribed 15 percent level, the open offer gets triggered as this deal results in a change in management," said Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities.At this point, it is still unclear whether the promoters will participate in the open offer. The promoters own 42 percent in Everonn.

On the face of it, the deal seems to be a winner for both sides: while Gems gets a good launchpad into the Indian education sector, Everonn gets a strategic investor. Gems is the largest private kindergarten-to-year-12 (K12) education operator in the world. In July last year, Everonn had announced that it planned to open 300 K12 schools over the next five years, and Gems' expertise could come in very handy.

For Everonn, especially, the deal represents an attempt at getting back to business as usual after an eventful few weeks and could help bolster investor confidence in the stock.With scam-tainted Kishore no longer expected to return to the company, it may be time to look beyond the company's current travails. "It is an interesting development, given the state the company is in," said Jehan Bhadha, analyst at Darashaw. "An investor would only get in if he is clear about the business model and growth prospects of the company and through a check on the balance sheet." Earlier this week, market expert SP Tulsian of sptulsian.com said he believed Everonn Education shares could rally up to Rs 440. Devang Mehta of Anand Rathi Financial Services also told CNBC TV18 he thought Everonn was worth investing at current levels.

For now, the gloom surrounding Everonn seems to be lifting.

Watch video:Everonn-GEMS win-win deal likely to trigger open offer

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