Will investors cheer or protest the Grasim-Nuvo merger?
Investors in Aditya Birla Nuvo Ltd had been hounding it with one question—when will the financial services business be demerged and listed as a separate entity? The company would typically dismiss this, saying some of these businesses were still small and needed the backing of a large firm such as Nuvo.
The company has now decided to demerge the financial services business and list it. But instead of ending up with a leaner corporate structure, the Aditya Birla Group has made things far more complicated, by merging Nuvo with Grasim Industries Ltd. Besides, the complicated restructuring will increase the promoter group’s stake in the cash cow cement business and decrease its ownership of the cash guzzling telecom business.
Before the demerger, Nuvo will be merged into Grasim, which means investors of both companies will be saddled with a myriad of new businesses they earlier did not have any exposure to. The group’s chairman, Kumar Mangalam Birla, said in a press conference that the merger, along with the demerger, will create value for shareholders. But on the contrary, with an increasing number of businesses ending up under one holding company, value could get destroyed. The only silver lining for existing shareholders is a holding in the to-be-listed financial services firm.
The new behemoth that arises out of the merger will have so many diverse interests, most investors are likely to shun it. After all, each of the interesting parts of these businesses will be separately listed—UltraTech Cement Ltd for the cement business, Idea Cellular Ltd for the telecom business and finally the newly listed financial services business. Investors may steer clear of a firm where a holding company discount is applied to so many large businesses.
For perspective, Grasim’s 60.25% stake in UltraTech Cement itself is valued at less than 70% of its market value because of the holding company discount. Until now, for Grasim shareholders, there was at least an arbitrage opportunity, which would come into play when share prices fell vis-à-vis UltraTech Cement’s share price. In Nuvo’s case, some investors found the play on the financial services story compelling. There are hardly any reasons to invest in the merged company, certainly not after the financial services firm lists.
Interestingly enough, the promoter holding in Grasim will rise from 31.3% to around 38.8% post the restructuring. Their ownership in the financial services and telecom businesses will decline. Minority shareholders of Grasim, on the other hand, have to settle for a lower stake in the cement business and take on exposure to the telecom and financial services business. Since the promoter group is considered the most informed investor, a natural question these investors will have is, “Why should we do the opposite of what the promoters are doing?”
Nuvo’s shareholders, a far smaller piece in the whole puzzle in terms of their value of shareholding, get to enjoy the same ride as the promoters. But again, they too end up with an investment in a holding company. All told, it is not clear that the merger will add value, and minority investors may well protest.
The writer does not own shares in the above-mentioned companies.