Singapore: Billionaire Kumar Mangalam Birla overestimated investors’ tolerance for complexity, and ended up destroying more than $700 million of shareholder value over just two trading days this month.
With his team now doing a better job of explaining the rationale behind a confusing marriage of two group companies, the lost wealth stands a good chance of being recouped. What may be irretrievably gone, though, are the voting rights that some minority investors are being asked to sacrifice.
Birla’s justification last Thursday for the merger of Grasim Industries and Aditya Birla Nuvo was that the former had plenty of free cash flow, thanks to its cement and viscose staple fiber businesses, while the latter was exposed to fast-growing industries like telecom and finance. Together, the combined entity would offer a blend of growth and stability. Two of those businesses—cement and telecom—already have separate listings. After financial services are spun off via an IPO, investors would have a choice of owning either the operating entities or the holding company.
While the description was accurate, it still managed to spark a rush for the exits among investors of both Grasim and Nuvo, despite most equity analysts concluding that the proposed share swap is fair.
The reason for the nervousness? Apart from the usual concerns about a holding-company discount, Grasim investors probably loathed the idea of being partly on the hook for mobile operator Idea Cellular’s debt. With the price war in India’s telecom sector turning brutal, that anxiety is justified.
Final holding structure
But funding telecommunications with Grasim’s cash isn’t the plan—at least for now. Birla’s team did well to explain that financial services, currently a wholly owned subsidiary of Nuvo, would be better off with higher-rated Grasim’s balance sheet backing its future expansion.
That makes sense. India’s state-run banks are too capital-starved to finance new assets. And while large diversified conglomerates such as Birla won’t be allowed by the monetary authority to run their own fully fledged banks, there will plenty for them to do as financiers, asset managers and insurers. Both Grasim and Nuvo shares stabilized on Wednesday.
Even so, there are question marks around the deal’s lopsided structure. For one, Birla and related parties get to own 39% of an enlarged Grasim, and would eventually control an additional 17% in financial services. Throw in merged Grasim’s 57% ownership of this sunrise business, and the main shareholders would effectively lord over 74% of its voting rights, according to proxy researcher InGovern.
In a full demerger, the Birlas would have controlled no more financial services than the 39% they would own in a merged Grasim. For all practical purposes, the partial demerger appears to give the controlling shareholder privileges in excess of what it has paid for.
South Korean chaebols’ web of cross-shareholdings allowed founders to control large empires with little equity. Billionaire Birla’s double-dipping isn’t in the same league. But it does make for a less-than-pleasing sight. Bloomberg