A Ship of Theseus – with or without treasure?

Max India Ltd (erstwhile) decided to restructure itself some time back. The company got restructured into two entities:

  1. The hospital business (new name Max Healthcare) got acquired by Radiant Healthcare (a JV between Mr. Abhay Soi and KKR) and got listed a week back.
  2. Remaining part was left with the Senior living business (Antara), A few floors in their commercial building Max towers in Noida and cash from Max Bupa sale (the Insurance business that the company sold to the PE firm True North).

The second entity got listed on 28th Aug 2020 under the name Max India Ltd (the new Max India). This company has an interesting special situation going for it.
Please see the timeline below:

A) 7th Feb 2020

In the conference call, management says the following:

When we were divesting Max Bupa, so the shareholders said that we will only approve divestment if you give us a proportionate share of cash. So we — because we invested in Max India for 2 reasons. One was Max Hospitals, which anyway we are giving a share through merger/demerger. And second is for Max Bupa, which we are now divesting. So if you give us a proportionate share of cash, we would like to seek an exit option by getting that proportionate share of cash. So therefore, that’s how the capital reduction maths was worked out.

This INR 200 crore capital reduction is the — in a way corollary to the buyback option of INR 17.30.

Now just one more sort of clarity I just want to give, that when I say INR 17.30, it’s today INR 2 share. But what we are also doing is the consolidation of shares, when the INR 2 share will become a INR 10 share, and number of shares will become 1/5. So correspond — so therefore, the corresponding numbers from INR 17.30 will become INR 86.50.”

Emphasis is ours.

This essentially means that the management said that there will be a reverse split before the listing and that the company will do a capital reduction to the tune of ₹ 86.5 per share.

B) 24th Aug 2020
Company released an Information Memorandum with the following paragraph in it (page 32):

12. Utilisation of the funds of the Company

At the time of the Max Bupa transaction, the Company expressed its intent to use the proceeds from divestment for its future growth and to give its shareholders, who do not prefer to be a part of next phase of growth of the Company, an exit option through an appropriate mechanism. For example, by offering a proportionate share of the divestment proceeds through capital reduction, subject to applicable laws and taxes.

However, due to the COVID-19 pandemic, and its unforeseen impact on the shrinkage of the economy, and consequent impact globally and on our businesses, the Board has considered it prudent to conserve the cash reserves of the Company till such time it has reasonable certainty in terms of sufficiency of funds to meet growth objectives, debt obligations, committed liabilities and performance recovering to pre-CoVID levels.

Emphasis is ours.

C) 28th Aug 2020

An announcement by the company:

This is to inform you that a meeting of the Board of Directors of Max India Limited (‘the Company’) is scheduled to be held on September 15, 2020 to consider inter-alia, (i) unaudited financial results of the Company (both Standalone and Consolidated) for the quarter ended June 30, 2020 and (ii) a proposal for capital reduction of the Company.

First the management talks about capital reduction around ₹ 86. Then on 24th August seems to defer it. Finally again on 28th August indicating that a board meeting will be held on 15th Septemeber, 2020 to consider it.

What will actually happen only future will tell, meanwhile the stock price is languishing at ₹ 76 in lower circuit.

Note: This note is only for the purpose of making sense of things. It doesn’t entail any buy or sell recommendation and any comment on the management of the company. Although efforts have been made to provide the relevant information in a concise manner, Please do your own research and do let us know if something is missing.

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