Grasim-ABNL Merger: That 70’s show
On 12 August 2016, the Aditya Birla Group announced the merger of its two holding companies, Aditya Birla Nuvo Limited (ABNL) and Grasim Limited. As part of the restructuring, the financial services arm, Aditya Birla Financial Services (ABFS), will also be subsequently demerged and listed separately.
IiAS will engage with the stakeholders and wait for the shareholder notice of the merger before articulating a voting recommendation. In the interim, we examine the historical construct of the group structure, which will give market participants context to the transaction.
Holding Structure and Control
The KM Birla Group has a complex holding structure, with cross holdings between multiple group companies. A large part of this is due to legacy issues: some of the newer companies, including Ultratech Cements, Idea Cellular and Aditya Birla Fashion & Retail (ABFRL) have relative cleaner ownership structures.
One of the stated drivers of the proposed transaction is simplifying this group structure. However, this is true only to a limited extent. There will be some consolidation of promoter stakes across group companies; but the merger really does not streamline the businesses by removing all cross linkages.
The post-merger Grasim will be a conglomerate comprising a diverse set of unrelated businesses. Thus, Grasim is taking a step towards positioning itself as the Birla group’s holding company. This raises uncertainties on capital allocation, and it will become difficult to value the company correctly. Therefore, the market is likely to punish the stock with a higher holding company discount.
The scheme will give the promoter group almost 74% effective ownership of the financial services business (ABFS) once it lists. Had ABFS been demerged before merging Grasim, its shareholding would have mirrored that of ABNL’s: in such circumstances, the promoter group would have owned just 58.4%.
Across the group, the promoter family’s control over the listed companies has been higher than its direct shareholding – an arrangement typically seen in the Indian markets of the 1970s. The current transaction lends itself to yet another of those structures.
Increase in promoter stake
Over the last 15 years, the promoters have steadily increased their stake in most of the listed companies in the group
Chart: Promoter stake (%) in group companies
This is part of the group’s stated strategy of boosting the promoter shareholding in the flagship entities (ABNL, Grasim, IDEA, Hindalco and Ultratech). In May 2004, K M Birla had mentioned that he wanted to shore up the promoter holding to 30%. This was accomplished by December 2010, through a series of restructurings, creeping acquisitions and preferential allotments. This threshold was raised and in October 2011, K M Birla stated that he wanted to increase the promoter holding to 40%.
This has also largely been achieved, except in Grasim where the promoter stake is currently 31.3%: the proposed merger will increase the promoter holding to 39% - just a breath away from the 40% target. Table 2 below shows how promoters have increased stake in the listed group companies over the past 10 years.
Table 2: Increase in promoter holding
There is a discernible pattern in the way the shareholding has been increased: between 2000 and 2007, the preferred mode was creeping acquisitions. From 2008 onwards, the stake increased mostly through preferential allotments of shares and warrants. In 2015-16, and with the proposed transaction, the preferred mode to increase shareholding is through corporate restructurings.
The Birla group’s predilection for preferential allotments during the 2007- 2014 years have diluted minority shareholders significantly. For example, in ABNL, between 2007 and 2014, promoter shareholding went up from 40.5% to 57.2% through preferential allotments, resulting in minority shareholders’ dilution by 28%.
Once again, through the ABNL merger, Grasim’s minority shareholders will get diluted by 29%, but promoters will have achieved their target of holding 40%. Grasim will be a bigger company, but its shareholders get exposed to the financial services and telecom businesses, which are capital-intensive and, given the competitive landscape, likely to remain cash hungry.
Shareholders need to ask themselves: is it worth it?
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