It may eventually boil down to Carlyle sweetening the offer price
PNB and PNB Housing have been in the news in the last few weeks for all the wrong reasons. More than anything, it has now become a serious corporate governance issue. Here is the story.
Selling a stake to Carlyle
It began when PNB Housing approved fund raising by issue of shares as well as warrants worth Rs.4,000 crore to Carlyle Group. This would make Carlyle the majority shareholder in PNB Housing with over 50% stake. However, the deal was ordered to be put on hold after strong objections from proxy firms. The court ordered that PNB Housing could conduct the EGM but could not disclose the outcome of the vote. That is where it will stand till the final order in July.
Why proxies had objections
The proxies had objections to the deal on multiple fronts. Firstly, they felt that diluting the stake to a PE fund was not in the interests of shareholders. It must have been a rights issue instead. Proxy firms also objected to using the formula of average price for valuing the stock of PNB Housing at a time when it was well known that all PSU stocks were trading at a huge discount. Proxy firms like SES felt that Carlyle was getting access to a prime PSU property with a massive pan- India network without paying any sort of control premium. Proxies have called for an independent valuation to be the basis of pricing the share placement.
Understanding the role of PNB
A lot will depend on how PNB plays its part. For now, it is not clear how PNB has voted at the EGM but if reports are to be believed, then PNB has voted against the Carlyle deal. Clearly, PNB is not in a position to infuse fresh funds into PNB Housing so it needs an outside investors to shore up capital adequacy. However, PNB can play an important role as it still holds around 32% stake in PNB Housing. For the resolution to pass at the EGM, 75% of votes are required. That means; if PNB objects, then Carlyle deal really cannot go through. But, PNB cannot infuse funds on its own, so it looks like a Catch-22 situation for now.
Getting out of this Catch-22
PNB may be inclined to exercise its vote in favor of minority shareholders as LIC did in the case of Vedanta when it felt that the price was too low. The big issue here is that the placement is being done at Rs.390 per share though PNB Housing has a book value of Rs.525 per share. Then there is the issue of control premium as well as the fact that most PSUs trade at depressed valuations. The fact that the stock price has since doubled to Rs.800, shows that the price was fundamentally off tangent. The best middle-path will be for Carlyle and the Aditya Puri family office to sweeten the bid and offer a higher price. That would really assuage the minority investors and proxy firms and will be fair too!