AB Nuvo-Grasim merger to create a company worth Rs 60k-cr
With diverse businesses spanning manufacturing and services, the combined company provides a play on India’s growth story.
MUMBAI: Aditya Birla Nuvo will merge with Grasim under a grand plan stitched by the Aditya Birla Group management to beef up shareholder value but worried Grasim investors continued to sell shares of the firm for the second successive day fearing the plan would stretch its balance sheet and dilute focus.
Kumar Mangalam Birla, whose great grandfather Ghanshyam Das Birla started Grasim 10 days after India’s Independence in August 1947, announced the merger on Thursday, terming it a major play on the India growth story. He said the proposal would simplify group cross-holdings and deliver value from a diverse range of businesses to shareholders.
The financial services business of Nuvo (ABNL), held separately under three different companies, would be demerged and listed, said Birla, chairman of the group.
“Grasim’s shareholders are also getting exposure to financial services and telecom and the listing of ABFSL (Aditya Birla Financial Services) gives them ample scope of value unlocking,” he added.
ET was the first to break the story in its edition dated August 10.
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AB Nuvo will Cease to Exist
The combination of Nuvo and Grasim would create a company with a combined market cap of Rs 62,767 crore and a turnover of around Rs 59,766 crore with operating earnings of Rs 11,961 crore.
Aditya Birla Nuvo, formerly called Indian Rayon & Industries, will cease to exist after the merger. All financial services businesses, including insurance and payments bank, will be listed on stock exchanges. Aditya Birla Financial Services is currently a 100% subsidiary which houses the non-banking financial company, housing finance, asset management, general insurance advisory, private equity, broking and wealth businesses, among others.
The life insurance JV — Birla Sun Life Insurance — is however held independently under Nuvo as a separate venture.
The listing of financial services is expected to benefit shareholders of both Nuvo and Grasim as rapid retail credit growth and a boom in insurance policies has turned private sector banks and NBFCs into stock market darlings.
Nuvo also owns 23.3% in Idea Cellular, the separately listed telecom venture, and 9% in Aditya Birla Fashion & Retail as of the past financial year. The merged entity will own 28% in Idea.
The listed financial services company will be 57% owned by post-merger Grasim and the balance by post-merger Grasim shareholders on a proportionate basis. The promoters led by Birla himself will own 17% of the company. Birla hinted that he is open to bringing in partners — both financial and strategic — to grow the financial services business even further but warned that nothing is concrete as yet.
Each shareholder of AB Nuvo will get three new equity shares in Grasim for every 10 equity shares held in Nuvo. That means a shareholder having 100 shares in AB Nuvo will receive 30 shares in Grasim. Similarly, for the demerger of the financial services business, each shareholder of Grasim (post-merger) will receive 7 equity shares in Aditya Birla Financial Services for every equity share held in Grasim. That means a shareholder with 100 shares in Grasim will receive 700 shares in Aditya Birla Financial Services.
In aggregate, each shareholder of Aditya Birla Nuvo holding 100 shares will receive 30 shares in Grasim and 210 shares in Aditya Birla Financial Services. The listing is planned for May-June next year.
DSP Merrill Lynch, PwC, Kotak Mahindra Capital and JM Financial advised the various AB Group companies and also helped in the valuation exercise and independent fairness opinion. Khaitan & Co and Cyril Amarchand Mangaldas were the legal advisers.
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STOCKS UNDER FIRE
The Birla stocks, especially that of Grasim, have been under fire. The Grasim stock is down 14% in the last 3 trading sessions losing close to Rs 6,000 crore in market capitalisation. Market analysts frowned upon what they perceived to be a complex corporate structure of a combined Grasim-ABNL. Moreover, many read this move as an attempt to bulk up the balance sheet of Idea Cellular ahead of spectrum auction and the launch of Reliance Jio, which analysts expect will result in heightened competition and price wars.
On Thursday, Grasim shares ended at Rs 4,538.95 on the Bombay Stock Exchange, down 6.44% from the previous close, while the benchmark Sensex rose 0.31% to close at 27,859.60 points. Aditya Birla Nuvo shares rose 3.5% to Rs 1,565.70.
Birla rejected such motives. “The markets have been harsh. This is not a platform to grow Idea. Idea can fund its own growth plans. It is just coincidental that this is happening ahead of the imminent launch of Reliance Jio. There has been an over and more than necessary focus on this,” he said.
Idea Cellular recently said it has over Rs 4,000 crore on its balance sheet and generates Rs 11,000-12,000 crore of free cash each year.
As of March 2016, the consolidated debt of Grasim Industries was Rs 9732.48 crore while Aditya Birla Nuvo’s debt stood at Rs 33,959.18 crore.
Some investors are sceptical about this claim. The merged firm will need to support Idea when it wants to raise money, they added. While the net gearing of the new company will not be high, the absolute debt level will go up and this has worried some investors. Also, Grasim shares already suffer from some holding company discount as it owns 60% in UltraTech, India’s biggest cement company. The new arrangement would bring financial services and Idea under Grasim, thereby increasing the holding company discount.
Grasim Industries started as a textile manufacturer in 1948. Currently, its core businesses are viscose staple fibre and cement, which contribute over 90% of its revenue and operating profit. The group’s cement business was split between Indian Rayon (now Nuvo) and Grasim in the 1990s before it was shifted completely to Grasim, which in turn got merged with UltraTech. Following its merger with Aditya Birla Chemicals last February, Grasim has been positioned as a conglomerate.
In the past fiscal, Grasim clocked total consolidated sales of Rs 36,217 crore and posted a net profit of Rs 2,359 crore.
Last year, the $41-billion Aditya Birla Group consolidated its garments business into a single entity by carving out premium apparel maker Madura Garments Lifestyle Retail Co Ltd from AB Nuvo and merging it with Pantaloons Fashion and Retail India to create India’s largest branded clothing company with annual sales of Rs 5,290 crore.
With holdings in the group’s financial services, telecom, fashion and lifestyle, and divisions of fertilisers, insulators, linen manufacturing and rayon, AB Nuvo so far was positioned as a diversified conglomerate within the group as well as an incubator of new businesses.
“We have spun off fashion, carbon black in the past. Once businesses scale up, we always look at ways to unlock value. We are among the top 10 diversified private NBFCs in the country and top 4 private sector life insurers and AMCs. So this is the perfect time,” said Birla.