Grasim-Aditya Birla Nuvo merger explained: Why are analysts, shareholders not cheering

Aiming to create a strong presence in the financial services category, the $41 billion Aditya Birla Group on Thursday announced a mega restructuring plan by merging group firms Aditya Birla Nuvo Ltd and Grasim. Post the alignment, the financial services business of the merged entity will be spun off and merged with ABFSL, whose shares will be consequently listed. [caption id=“attachment_2149279” align=“alignleft” width=“380”]  Aditya Birla Group chairman Kumar Mangalam Birla. AFP[/caption] In a BSE filing, ABNL said the move is “aimed at creating one of India’s largest and well-diversified companies with a combination of cash generating and high growth businesses.” However, Aditya Birla group shareholders are not totally convinced about the merger plans, and fear the new complex structure could result in higher debt on the books of Grasim. Some analysts also opine that the confluence of these two companies could have been done primarily to financially support its telecom arm Idea Cellular during the spectrum auction to be held later. While several pros and cons would be weighed as analysts expand their scope of research, here’s a quick look on the deal and the concerns of the shareholders: How is the deal beneficial for Grasim and Aditya Birla Nuvo shareholders? According to Grasim’s managing director Dilip Gaur, the merger provides the shareholders of Grasim with exposure to fast growing sectors, including telecom and financial sectors. For ABNL shareholders, the transaction would provide its shareholders direct exposure to seasoned, strong cash flow generating businesses. Also, shareholders will benefit from a larger free float and better liquidity of the combined company. It will also unlock value for shareholders via the listing of financial services company. What is the share-swap ratio for Grasim and ABNL shareholders? The share-swap will be 3 equity shares of Grasim for every 10 equity shares of Aditya Birla Nuvo, and 7 shares of Aditya Birla Financial Services for every 1 equity shares of Grasim (post merger) . Why are shareholders not convinced? The merged entity will result in a complex structure with higher debt and lower stock valuation for Grasim shareholders. Further, the carving out of financial services business and subsequently listing it on the bourses will not offer full benefit of value unlocking for AB Nuvo shareholders, ET report said. The merger will also bring into Grasim’s fold telecom and finance segments, which does not complement well with each other, shareholders say. What are analysts saying? At the end of June 2016, Idea’s net debt position stood at Rs 37,658 crore. Analysts fear that since AB Nuvo has 23.3 percent stake in Idea, the proportionate debt would be Rs 8,736 crore, which will reflect in Grasim’s book after the merger. Analysts believe the restructuring will result in debt of the group’s telecom business, Idea Cellular, to the balance sheet of cash-rich Grasim, the ET report said. “The merger is a big loss for Grasim as it will be saddled with around Rs 35,000 crore additional debt,” the ET quoted SP Tulsian, founder of advisory Premium Investments, as saying. “The merged entity will hold 57 percent stake in financial services business that will be de-merged from AB Nuvo. The holding company discount will erode value of both Grasim and AB Nuvo.” How are AB Nuvo and Grasim shares faring on the bourses? Even as benchmark indices, Sensex & Nifty, notched up significant gains in early trade on Friday, Aditya Birla group shares tend to continue with its downward spiral. Extending its fall, AB Nuvo sares tanked over 20 percent to trade at Rs 1,248.45. Similarly, Grasim Industries stock dropped nearly 4 percent to Rs 4,371.45. Both, Idea Cellular and UltraTech Cement, too, are trading marginally lower in a firm broad market sentiment.