Block Deals in United Spirits : Can it Happen ?

Et now carried an exclusive source based story that Diageo may buy up to 25 % Stake in United Spirits @ 1440 - 1450 per share. The purchase will be in terms of Preferential Allotment , Sale of treasury stocks and Sale of shares held by Promoter ( Dr Mallya and his group companies), which will be followed by open offer of another 26 %.

        

    

It went on to say that the announcement will come after 15th October and Promoters are likely to sell shares via secondary market block deals to save on Capital gains tax.

This source based news leads us to believe that shares will be sold through market and hence the price on Screen would be 1440/- and all investors would be able to sell it on screen, without waiting for open offer.

This story suffers from Practical flaw and also Technical flaw

Practical Flaw :

This story is sensational and would increase volatility and prompt investors to commit shares at lower price (CMP 1260 /- ) and sell between 1400 to 1440 keeping margin of safety. It is a good strategy buy it is not as simple as it seems.

Let us first understand, what is block deal ? Block deal is an order matching system, where trade takes place in stock Exchange but not on normal market segment. Block deals are done to enable buyers to sell stock only to specified seller and to match exact quantity. This is to avoid for slippages in quantity of stocks in open market.

But there are are rules and guidelines to be followed while executing the block trades

a) The trade value should not be less than Rs 5 Crores

or

b) The trade quantity should not be less than 5,00,000 shares

 and 

The trade can take place between +/- 1% of Closing Price or Prevailing Price.

http://www.sebi.gov.in/circulars/2005/mrdcir0192005.html

Based on this rationale United Spirits should trade at not less that 1427 /- for the block trade to take place.  Investors would prefer selling shares below 1427 rather than wait for open offer, which means practically, it would be difficult for market trade of Dr Mallya to take place without buying shares from individual shareholder.

Technical Aspect :

If at all, the deal is signed between Diageo and United Spirits, Diageo cannot but the shares the next day .

The deal will first go through the red tape i.e it will have to take permission from CCI, FIPB, SEBI (There can be some more) . Dr Mallya have to take approvals from Boards, Shareholder and then only the shares can be bought by Diageo.

Do you think all approvals can come overnight ?? It will take months ......

And so it would be best to describe Et Now source based information as gossip............. please beware.

This is not the recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.