Mumbai: Aditya Birla Group executives justified the complex structure of the merger of Grasim Industries Ltd and Aditya Birla Nuvo Ltd, saying the financial services business needed a parent with a stronger balance sheet to boost growth. The group’s failure to get a banking licence also seems to have played a part in arriving at the current structure.
On Thursday, the group announced that it would merge Nuvo and Grasim, both of which also serve as holding companies, and spin off and list one of Nuvo’s subsidiaries, Aditya Birla Financial Services Ltd. After the merger, Grasim would become the holding company of the group’s cement, financial services and telecom business besides operating a textiles and chemicals business.
Shareholders didn’t take kindly to the deal structure. Since Wednesday, shares of Grasim have dropped 5.91% and Nuvo 14.71% in comparison with a 1.36% gain for the benchmark Sensex. Proxy advisories, too, have voiced concerns about the deal. The group’s executives, however, believe there are sound reasons for structuring the deal the way it has been.
Spinning off financial services
One of the main criticisms of the deal is that the group could have spun off the financial services business as a separate entity instead of adopting the current structure where Grasim will hold a 57% stake in the unit.
But for the financial services business to gain size and become as significant a company as UltraTech Cement Ltd is in the cements business, it needed the backing of a stronger parent than Nuvo, said Sushil Agarwal, wholetime director at Grasim and group chief financial officer (CFO) of Aditya Birla Group. UltraTech is a subsidiary of Grasim.
This plays out in three ways, Agarwal explained. One, on a rainy day, if there is some cash requirement, does the parent have the wherewithal to infuse money?
Second, it gives regulators more comfort and third, this move will enable the finance company to raise capital at lower costs since Grasim has a better credit rating (AAA compared with the former’s AA+).
“If we had got a banking licence, maybe we would have thought about it in a different way,” said Saurabh Agrawal, the group chief strategy officer. Then, the financial services business “wouldn’t have needed this kind of support and parentage. But once that option was decided by RBI ( Reserve Bank of India), frankly we had very few options to grow the financial services business”.
While strategy officer Agrawal refrained from giving a projection of the capital needs of the financial services business, he said it would likely be at least Rs.1,000 crore annually from the next financial year.
Control of finance
A second concern has centred around the apprehensions of Aditya Birla Nuvo investors that their exposure to the high-growth finance business could get diluted.
As proxy advisory firm InGovern Research Services pointed out in a note, after the merger, the total effective control of promoters in the financial services business would be close to 74%, “close enough for approval of any special resolution in the future”.
The promoters have a 58.4% stake now in Nuvo, which has full ownership of the financial services business.
“If you see the math, we are actually reducing control,” said Ashish Adukia, head of group corporate finance at Aditya Birla Group. The actual (and not effective) stake for the promoters comes to 41%. He also added that the financial services company will eventually be listed. “There will be an independent board that comes into place.”
Of course, a full demerger would have the promoter-to-public shareholding in the financial services business at 39:61, but “then it gets back to the question of strong parentage”, he added.
Promoter stake in Grasim
One question which Grasim’s minority shareholders are asking is why the promoters are hiking their stake in Grasim while minority shareholders are seeing a fall in theirs. Under the new structure, the promoter holding in telco Idea Cellular Ltd (which is in investment mode) falls from around 14.7% to 10.9%.
This hasn’t been done by design, said CFO Agarwal. It is purely because Nuvo and Grasim were “holding (stakes) in a particular way”. The idea wasn’t to make Grasim’s public shareholders take more exposure to the financial services and telecom business in return for a smaller share in the company.
The holding company discount
Analysts have also pointed out that the wait for a reduction of the holding company discount for Grasim’s minority shareholders only gets longer with the deal.
“The holding company discount is a myth,” said CFO Agarwal. He argued that it is applicable only when there are leakages in the tax system, such as when dividends are taxed twice. It also depends on the operating company’s performance and Grasim’s holding company discount was anyway coming down in normal course because of better results for its viscose business, he added.
“Today, Grasim shareholders have a chance to buy a cement company directly, but if they believe buying a holding company gives them a slightly better so-called defensive position they do that. And tomorrow, if they want to buy financial services and telecom companies separately, they have these choices,” he added.
As far as the complex ownership structure is concerned, the executives said that the group had only reduced cross-holding among its companies over the last 15 years, not increased it.
“Every time we get a restructuring opportunity, we tried to reduce it (cross-holding),” said CFO Agarwal. In this case, the boards of Nuvo and Grasim saw the merger as a way to propel growth of the financial services business and create another big business for Grasim, he added.
The executives also tried to allay fears that Grasim’s cash would be used to fund Idea’s capital expenditure requirements or even for the new financial services business.
“The Grasim board has been judicious in capital allocation over the last 20, 30 years. In the normal course, (other companies) will get their own capital,” said CFO Agarwal.