Billionaire Kumar Mangalam Birla’s decision to merge Grasim Industries and AB Nuvo, the two subsidiaries of Aditya Birla Group, has not got down well with investors. AB Nuvo shares, which had crashed 25 per cent on Friday, resumed their downward journey today, falling over 6 per cent. Grasim Industries shares traded 3 per cent lower today. Together, the two companies have shed over Rs 10,000 crore in market cap since the merger deal was announced on Thursday evening.
Recap of AB Nuvo, Grasim Merger Deal:
1) Grasim and AB Nuvo will merge through a stock swap by March 2017. AB Nuvo’s stakes in businesses such as telecom and retail will be merged into Grasim, which owns India’s biggest cement business through its UltraTech subsidiary. Grasim will also take AB Nuvo’s 23.3 per cent stake in Idea Cellular.
2) The combined entity will be called Grasim and it will have five key verticals – cement, financial services, telecom, textiles, and chemicals. Promoters will hold 39 per cent stake in Grasim.
3) Once the merger is done, the financial services business of AB Nuvo (stock broking, mutual fund, housing finance, etc.) will be spun off and listed separately by May or June 2017. Grasim will retain a 57 per cent stake in the financial services company after the listing.
4) AB Nuvo shareholders will get 3 Grasim shares for every 10 shares held in the company. Grasim shareholders will then get seven shares of the financial services company for each share held in Grasim. Analysts have termed the swap ratio for the merger as fair.
5) According to Aditya Birla Group, the merger would give investors the opportunity to play India growth story through a company which has exposure in three high growth segments – cement, telecom and financial services.
Snapshot of Combined Entity Shareholding Structure
Why Are Investors Disappointed?
1) Holding company discount to widen: Both Grasim Industries and AB Nuvo are holding companies as they hold shares of other listed and unlisted firms and earn income mainly through dividend. Holding companies trade at a discount to their market value. Grasim Industries trades at a 35 per cent discount, while AB Nuvo trades at a 55 per cent discount, according to Edelweiss Securities. The merger between Grasim Industries and AB Nuvo could result in much higher holding company discount for Grasim, which will be negative for shareholders in the short term.
“The stock could de-rate as its holding company discount widens post-merger. We believe Grasim is unlikely to retain its status of a proxy play investment for cement in India post-merger. We would recommend investors to buy only into pure play cement companies to ride the cement upcycle,” said Religare Securities.
2) Complex deal: For current Grasim Industries’ investors, the merger means acquiring unrelated and leveraged businesses such as telecom (Idea). According to Religare Securities, Grasim’s balance sheet will be leveraged for investments in telecom, with Grasim’s stake in Idea Cellular rising to 28 per cent post-merger from 4.75 per cent currently. On the other hand, AB Nuvo shareholders’ exposure to the high-growth finance business will get diluted.
“Apart from being a hugely complicated deal, it doesn’t seem to make a great deal of sense for the restructuring of the Group… As a Grasim shareholder, you are getting the financial business, which is good, but the underlying feeling is that the cash flow will be used to fund Idea Cellular’s expansion plans…because of that people are looking at negatives, rather than positives,” said Andrew Holland of Ambit Capital.
3) Benefits to accrue in long term: Most analysts say the benefits of the merger will accrue in the long term, something that AB Nuvo investors in particular are not happy about.
“The benefits would be longer term and shareholders are thinking they don’t want to wait that long. There are lots of moving parts that will have to happen before you start unlocking the whole value of this restructuring… I think that’s where the disappointment is coming from,” Mr Holland added.
Grasim shares closed 1.7 per cent lower at Rs 4,484.60, while AB Nuvo shares ended 4 per cent lower at Rs 1,238.30. Both stocks underperformed the Nifty that ended 0.34 per cent down.