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23Rd Aug 2016
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| Birla Group (The Total Investment & Insurance Solutions) |
On 12 August 2016, the Aditya Birla
Group announced the merger of its two holding companies, Aditya Birla Nuvo Ltd
(ABNL) and Grasim Ltd. As part of the restructuring, the financial services
arm, Aditya Birla Financial Services (ABFS), will also be subsequently demerged
and listed separately. However, the merger really does not streamline the
businesses by removing all cross linkages, says a report. The Total Investment
& Insurance Solutions
In a report, proxy advisory firm
Institutional Investor Advisory Services (IiAS), says, "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."
"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," it added. The Total Investment
& Insurance Solutions
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. The Total Investment
& Insurance Solutions
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Pre Merger (The Total
Investment & Insurance Solutions)
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," IiAS says. The Total Investment
& Insurance Solutions
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Post Merger (The Total
Investment & Insurance Solutions)
According to the proxy advisory
firm, the scheme (of merger) will give the promoter group almost 74% effective
ownership of the financial services business or 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%, it added.
Over the last 15 years, the
promoters of KM Birla group have steadily increased their stake in most of the
listed companies in the group. This is part of the group’s stated strategy of
boosting the promoter shareholding in the flagship entities like ABNL, Grasim,
IDEA, Hindalco and Ultratech. The Total Investment & Insurance
Solutions
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Promoter Stake
(The Total
Investment & Insurance Solutions)
In May 2004, KM 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, Mr
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 below shows how
promoters have increased stake in the listed group companies over the past 10
years," IiAS says. The Total Investment & Insurance Solutions
 |
Promoter Stake
(The Total
Investment & Insurance Solutions)
According to the proxy advisory
firm, there is a discernible pattern in the way the shareholding in KM Birla
group has been increased, especially 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.
However, at the same time, the Birla
group’s predilection for preferential allotments during the 2007-2014 years has
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," IiAS questioned.The Total Investment & Insurance
Solutions
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