Bajaj Auto has announced a buyback at Rs. 10,000, and the stock trades at Rs 7300 today. That’s a cool 37% premium on the market price (Read BSE Filling). The company has announced a buyback via tender offer for 40 lac shares, of which 15% (6 lac shares) should be reserved for retail investors holding less than 2 lac shares as of the record date. Around 2 lac shareholders hold up to 500 shares. Let’s conservatively assume all these shareholders hold less than 2 lac worth of shares.For the TCS 2023 buyback, approximately 33% of retail shareholders tendered their shares. Given the higher premium, assuming more % of shareholders will tender. So we take that 50% of Bajaj shareholders tender:

• Total retail shareholders: 2,00,000 (Dec 2023) - assuming no new shareholders are added for this buyback trade.
• No of shareholders tendering: 100,000 (~50%)
• No of shares tendered by each shareholder: 22* (on the higher side)
• Total shares tendered: 22 lacs
• Shares reserved: 6 lacs
• Predicted acceptance ratio: 28%

We also expect the price to correct after the record date since it doubled last year and rose 11% after the buyback announcement. If 50% of shareholders tender, we will see at least 28% acceptance. Now, consider that some of our assumptions are too harsh, and the acceptance ratio is 2X of this (say 50%). With a 50% acceptance ratio and a 10% price correction from here, we will make close to 13% on this trade. That’s not much for an experimental trade. Below is the payoff chart for different acceptance ratios and price changes.

Verdict - There is no clear arbitrage in this trade. This trade is essentially a punt on:

• Price move leading to (and after) the record date and
• Play on the acceptance ratio

This makes it a directional play and not a buyback arbitrage trade. Hence, we’ll skip this one without initiating a Capitalmind Premium experimental.

But a free vada Pau is available. You would rather have a wholesome lunch. But, as you know, lunches aren’t free in stock markets. Suppose you buy just one share of Bajaj Auto and tender it in the buyback. In that case, it will likely get accepted because of the preferential allotment given to zero entitlement accounts. So you would make Rs 2500 on this trade or a 33% profit - whenever the buyback goes through. (This one share buyback thing does not work if you already hold bajaj-auto shares in another demat account linked to your pan).

P.S.: As you see, we have made quite a few assumptions here (mostly conservative) without clear data. It is also one of the reasons why we are not committing to this experiment. But, if you have different views on the assumptions, feel free to plug those in and use this analysis framework.

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