The merger is not only complicated in its structure, but also unconvincing on several other elements, including the valuations of the holding company and its disadvantage to minority shareholders. Photo: AFP
Mumbai: Aditya Birla Nuvo Ltd shares on Friday tanked close to 24.63% intraday as analysts and minority investors disapproved of its proposed merger with Grasim Industries Ltd. The merger is not only complicated in its structure, it is also unconvincing on several other elements, including the valuations of the holding company and its advantage to minority shareholders.
Grasim shares declined close to 8.35% intraday.
Both stocks saw their biggest single-day fall in eight years,Bloomberg data showed.
Aditya Birla Nuvo touched a low of Rs1,180 a share, a level last seen on 30 June, and fell as much as 24.63%, its steepest fall since 24 October 2008. It closed the day at Rs1,290.15, down 17.6% from the previous close.
Grasim Industries touched a low of Rs4,160 a share, a level last seen on 11 June, and fell as much as 8.35%, its steepest fall since 11 December 2008. It closed the day at Rs4,565, up 0.57% from the previous close.
HSBC Securities and Capital Markets India Pvt. Ltd trimmed its target price as well as stock recommendation on Grasim to “hold” from “buy”. Other domestic and international brokerage firms are reviewing their forecasts based on the management commentary following the merger announcement on Thursday evening.
“Merger will likely remain an overhang as increasing complexity will be perceived negatively. Concerns regarding increasing complexity with addition of several non-core businesses remain,” said an HSBC note.
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Emkay Global Financial Services Ltd saw the merger transaction as a negative for existing shareholders. “Grasim becomes a holding company for the financial services business (in addition to being the holding company for cement business, UltraTech). Likelihood of using cash flows to fund Idea’s requirements is an additional negative. We don’t see any synergistic benefits from this transaction,” it said, downgrading its recommendation on Grasim to “reduce” from “buy”.
Analysts said that minority shareholders are likely to raise objections to the merger deal as Grasim will continue to get the same or higher holding company discount when compared with Aditya Birla Nuvo. This is simply because Grasim will become the holding company of Idea Cellular Ltd and the demerged financial services entity which will be named Aditya Birla Financial Services Ltd under the new structure.
“There is no value unlocking foreseen through the deal,” said an analyst with an American broking firm, on condition of anonymity due to the firm’s compliance rules.
CLSA in a note to investors wrote that the transaction creates a complex conglomerate and adds confusion for minority shareholders. “The new company has multiple businesses that share no commonality whatsoever,” it said.
The Aditya Birla Group is merging two of its main companies, Aditya Birla Nuvo and Grasim Industries, both of which also serve as holding companies, in an attempt to create a stronger entity, and unlock shareholder value by spinning off and listing one of Nuvo’s subsidiaries, Aditya Birla Financial Services Ltd (ABFSL).
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“Grasim will suffer the holding company, conglomerate discount that Aditya Birla Nuvo suffered for all these years. Sector-focused investors will not invest in such a diversified entity when there are direct operating entities listed,” said Shriram Subramanian, founder and managing director at proxy advisory InGovern Research Services Pvt. Ltd.
“If you see the beneficial interest of promoters in each of the companies, it is in the range of 20-30%, yet the promoters are able to retain control through cross-holdings and layering,” Subramanian said. So, the to-be-listed Aditya Birla Financial Services will have only 26% minority shareholders, and promoters will have 74% control, while the “true” beneficial interest of the promoters is only 39%, he said.
“We always advocate simple shareholding structures and business structures, but this maze of businesses will disappoint investors,” Subramanian added.
The merger will create an entity with yearly revenue of Rs59,766 crore, net profit of Rs4,245 crore and earnings before interest, tax, depreciation and amortization, a measure of operating profitability, of Rs12,000 crore.
Each shareholder of Nuvo will receive three new equity shares in Grasim for every 10 held. That means a shareholder with 100 shares of Aditya Birla Nuvo will end up with 30 shares of Grasim. And each shareholder of Grasim (post-merger) will receive seven shares in ABFSL for each share held. That means a shareholder with 100 Grasim shares will also get 700 shares of the finance company. In aggregate, each shareholder of Aditya Birla Nuvo who owns 100 shares will receive 30 shares in Grasim and 210 in ABFSL, Mint reported.
“It’ll come up for voting. I think we looked at multiple options of restructuring and when we looked at all the options, I think we felt as a management team, this is a restructuring which makes sense for both sets of shareholders,” Ajay Srinivasan, chief executive, ABFSL, said during a conference call to investors’ concerns over dilution in the holding in the financial services business and whether the board had other alternatives to the merger plan.
“…there would be pros and cons for every structure, which one can consider. And I think we can keep debating on that, but at the end of the day when we looked at the shareholders’ perspective and what makes sense for shareholders, we thought this is a great way of restructuring and giving access to shareholders directly to financial services, and at the same time take care of the residual, a smaller holding company, which would have risen as a result of a demerger of financial services.
“What we presented to shareholders to look at is a very strong company, which offers pretty much a proxy to the India growth story. It’s a mix of manufacturing and services businesses. It is the story which delivers significant growth going forward and this is an option to shareholders to either invest in this company or look at investing in each of the operating businesses, which we are giving as an option,” Srinivasan explained.