After slipping nearly 7% on Thursday, Grasim lost another 6% on Friday to Rs 4,250 levels on the National Stock Exchange (NSE) in early morning trade. On the other hand, shares of Aditya Birla Nuvo (ABNL) tanked over 22% in morning deals on Friday to Rs 1,211 levels after rallying 4.5% a day earlier on the NSE.
Both stocks have been reacting to the news of the proposed merger between ABNL with Grasim Industries (Grasim). The merged entity, according to a company presentation, pegs the aggregate revenue at Rs 59,766 crore with a profit after tax (PAT) of Rs 4,245 crore.
The restructuring will result in the listing of the merged financial services business, which will be 57% owned by post merger Grasim and the balance by its shareholders on a proportionate basis. Shareholders will receive three equity shares of Grasim for every 10 equity shares of Aditya Birla Nuvo, and seven shares of Aditya Birla Financial Services (ABFS) for every one equity share of Grasim.
The deal expected to be complete by the end of Q4FY16 / Q1FY17. The transaction is subject to approval from regulatory authorities, shareholders, High Courts of Madhya Pradesh and Gujarat, Competition Commission of India etc. Once complete, the combined entity will have five key verticals – Cement, Financial Services, Telecom, Textiles and Chemicals.
Analysts say the proposed merger will lead to an equity dilution of 40.8% and promoters’ holding in Grasim will increase to 39% from 31.3% presently. This will not be (earnings per share) EPS accretive for Grasim; and based on FY16 financials, there will be an EPS dilution of 7% for standalone business of merged entity.
“In addition to being the holding company for cement business, UltraTech, will now become a holding company for ABFSL as well. We believe that transfer of unrelated business verticals and AB Nuvo’s stake in Idea is not in favour of existing shareholders of the company,” says Sanjeev Kumar Singh, an analyst tracking the company at Emkay Global.
“We believe that merger of AB Nuvo into Grasim is not in the favour of existing shareholders and the company may command higher discount for its holding in different subsidiaries. We downgrade Grasim’s rating to REDUCE from BUY,” he adds.
The first reaction of investors and analysts in the conference call too, according to reports, did not appear to be positive as they fear that the wait for lowering of holding company discount has increased.
“A large number of queries centred around the rationale of adding more businesses where Grasim would be a holding company. Likewise, some Aditya Birla Nuvo minority holders were apprehensive that their exposure to the high?growth finance business may get diluted. Also, some Grasim minority holders were keen to have exposure to cement than telecom and other sectors. Considering that risks in cement sector are slowly receding, we would rather own pure plays like Shree Cement and UltraTech Cement,” point out Manish Saxena and Sharif Hadimani of Edelweiss in a report.
Analysts at Religare Institutional Research, too, gave a thumb-down to the deal and expect the merger to be a long drawn process given the scepticism expressed by minority shareholders in the management interaction call.
“This along with lack of clarity on growth prospects of other AB Nuvo business leads us to keep our target price and rating on Grasim under review. We however believe the stock could de-rate as its holding company discount widens post-merger,” say Mihir Jhaveri and Siddharth Vora of Religare in a report.
“We believe Grasim is unlikely to retain its status of a proxy play investment for cement in India post-merger and suggest investors to buy only into pure play cement companies to ride the cement upcycle,” they add.