Nuvo merger with Grasim starts debate

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The announcement is not even a day old but the proposed merger of Aditya Birla Nuvo (ABNL) into Grasim is already being questioned by some market participants.

The Aditya Birla Group’s management has tried to allay the worries. It says the merger simplifies the group structure and will lead to consolidation of fast growing businesses, with a stable and strong cash flow portfolio under one roof. And, that this would help unlock value for shareholders, through the listing of financial services and addressing the Street’s concern on debt issues (pertaining to the telecom business).

The Grasim balance sheet, it adds, would remain healthy after the merger, with a net debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio at 0.5. Debt of the telecom vertical (Idea Cellular) will remain on only the books of Idea, not reflect in that of Grasim, it said in an investor call after the announcement.

Some are not convinced. While Grasim was a holding company of UltraTech (cement business) and had a core business of textiles and chemicals, it will now become a holding company of many more business verticals — telecom, financial services and others. Hence, experts feel the holding company discount – that markets typically assign to the overall value of such companies — would widen.

Rakesh Arora, an independent market expert, feels this discount could widen to 60-70 per cent. Grasim was given a 40-60 per cent holding company discount for the cement business. Arora says it is very difficult to arrive at a fair value of the entities to be formed and whether minority shareholders will agree for a merger is to be seen. He feels the stocks of the two listed companies (Grasim and ABNL) might take some beating on Friday.

S P Tulsian, veteran investment adviser, feels the deal is highly negative for the minority shareholders. He says the merger has been done with an intent to increase the promoter stake in Grasim to 40 per cent (from 31.2 per cent now) and the ABNL stock should open 10-12 per cent lower on Friday. The Grasim stock already has seen a sharp fall of 14 per cent in the past two days and could dip another one to two per cent in the immediate term, say market experts.

This scheme, Tulsian says, will not be received positively by the investor community as a holding company structure has again been created for financial services, on the lines of UltraTech. “Grasim will be used as a money raising platform because ABNL has exhausted its money raising abilities and money will be used for Idea, which is again a black hole,” he feels.

Some are less negative. Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital, says it’s not so bad for Grasim. For, Aditya Birla Financial Services will be de-merged at some stage and historically in India, whenever a de-merger has taken place, both parent and child have outperformed in the following 12 months.

“Aditya Birla Money itself will do well on the de-merger news, given that NBFCs (non-bank financial companies) are doing well these days. There is a good chance that Grasim could see a re-rating after the merger,” says Mukherjea. He thinks the market reaction and the commentary around it are short-sighted. Both are holding companies and, thus, discounts will not double. The swap ratio is marginally positive for the Grasim shareholders, adds Mukherjea.

For every 10 shares of ABNL, investors will get three of Grasim. At the closing prices of ABNL and Grasim on Thursday of Rs 1,565.70 and Rs 4,538.95, respectively, there is arbitrage of 14 per cent in favour of Grasim. The swap ratio was announced after market hours on Thursday.