Based on today’s closing price (after excluding dividend of Rs 11) IDFC Ltd shareholders should get 135-140 shares of IDFC First for every 100 shares. However, based on the current shareholding after issue of new shares, they should get at least 165 shares of IDFC First. The arbitration is about 20%.
There are two different methods to play this. One, hold 50% IDFC and 50% IDFC First in your account. In that case, if the arbitration story plays out, one gets 10% extra gain on the best case scenario and 0% on worst case (assuming one won’t get less than the ratio of CMP)
The second method is to hold 100% IDFC – the best case is 20% and worst case is 0% on the arbitrage. So purely based on the above argument, the first method seems unnecessary.
But still I am more comfortable with first method. Since I don’t know how the share prices are going to move in the market and suppose the 1.35 comes down to 1.1, and the final merger is based on the share price and not on intrinsic value. I have no knowledge of the regulations, and therefore I am not sure if intrinsic value will be definitely considered for merger, or only last 3 months average price. Or maybe some other formula. Can anyone elaborate on this?
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