When your stock price tanks by 17% there is no room for misinterpretation in terms of market sentiment. The idea of merging Aditya Birla Nuvo (AB Nuvo) with Grasim Industries has met with widespread criticism as there is very little synergy among the businesses being merged. Rather than simplifying the structure, the merger will end up increasing complexity.
While Grasim's share price closed flat on Friday, AB Nuvo's stock nosedived to Rs.1,290 after the announcement. Even though a major part of this correction was due to the price differential created by the proposed swap ratio, the effect of the announcement cannot be discounted. The recommended swap ratio of three shares of Grasim for every 10 shares of AB Nuvo creates a price differential of only 14% as compared to the 17% slide.(Based on previous day closing price at Rs.1,566, the value of 10 shares of AB Nuvo comes to Rs.15,660 as against the value of Grasim's three shares at Rs.13,540.)
The incongruity of the companies to be merged manifests itself in many ways. While AB Nuvo operates in high growth emerging businesses like mutual funds and insurance, Grasim functions in traditional commodity sectors like cement and textile.
The numbers also project a similar story. Between FY12-16, AB Nuvo grew its revenue and EBITDA by 10.3% and 19% respectively, compared to Grasim’s 9.8% and 2.7%. Furthermore, during FY15, Grasim had a RoE of 7.8% compared with AB Nuvo’s 13%. Surely these numbers will look different post-merger as they will be diluted by the commodity businesses of Grasim. If that is not enough to make AB Nuvo shareholders unhappy, the merger will make them part of businesses they might not wish to be in; that is, textile, cement and chemicals.
The only possible reason behind the merger could be to increase the promoter’s share in the entity speculates Anil Singhvi, chairman, Ican Investment Advisors. “I see no synergy among the businesses that they are merging. No one bought Grasim in anticipation of getting financial and telecom businesses and vice-versa. This merger will only benefit the promoters whose holding will go up from 30% to 39%,” he says.
Another reason behind the merger could be to use the cash reserves of Grasim to pull the debt-ridden Idea Cellular out of trouble opines Gaurav Parikh, managing director, Jeena Scriptech Alpha Advisors. “They want to use the cash of Grasim to help Idea, which is sitting on huge debt and facing competitive pressure,” he says.
Further lengthening the list of concerns is the separate listing of AB Nuvo’s NBFC arm Aditya Birla Financial Services. With a book size of close to Rs.29,000 crore, a net NPA of 0.22% and RoE of 16%, the business can easily get a valuation of close to 3x book value which is Rs.14,000 crore – in line with industry standards. If this value unlocking happens, the NBFC alone will be 80% of AB Nuvo’s market cap.
However, the timing will decide the beneficiaries. If the listing happens after the merger, for every share held in Grasim, shareholders will get seven shares of ABFS. If it happens before the merger AB Nuvo shareholders will be the sole beneficiaries which Singhvi argues, should be the case. “Investors in AB Nuvo have patiently waited for the listing of the NBFC, otherwise what is there in Nuvo? They should cancel this merger and get the NBFC listed so the benefits can accrue to existing AB Nuvo shareholders rather than talk about merger and swap ratio, which I think will be completely different afterwards,” he concludes.