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Mumbai: The Aditya Birla Group is merging two of its main companies, Aditya Birla Nuvo Ltd (Nuvo) and Grasim Industries Ltd, both of which also serve as holding companies, in an attempt to create a stronger entity, and unlock shareholder value by spinning off and listing one of Nuvo’s subsidiaries, Aditya Birla Financial Services Ltd.

The merger will create an entity with yearly revenue of 59,766 crore, net profit of 4,245 crore and earnings before interest, tax, depreciation and amortization, a measure of operating profitability, of 12,000 crore.

The merger, announced on Thursday, will also mean the end of Nuvo’s existence. Aditya Birla Nuvo emerged in 2005 after the Aditya Birla Group decided to rename Indian Rayon and Industries Ltd (a company founded in 1956) and make it a vehicle to hold its businesses in the areas of finance, apparel and fashion, telecom and information technology (IT).

Today, around 80% of Nuvo’s revenue comes from three businesses: financial services, telecom, and fashion and apparel. It has exited the IT business, although it retains some of its older businesses such as linen, urea, viscose, and insulators.

Interestingly, it has spun off and listed its telecom business (Idea Cellular Ltd), and fashion and apparel business (Madura Garments was spun off and merged with Pantaloons Fashion and Retail that the Aditya Birla Group acquired from the Future Group).

Now, it plans to do the same with its financial business. If there is a pattern there, it is by design. Aditya Birla Nuvo was always seen as a vehicle for the larger group’s new businesses. The idea was to spin off and list those that succeeded, and sell those that didn’t look like they could become or challenge the No. 1 or No. 2 in their respective businesses (IT, for instance, was one business that Nuvo and the Aditya Birla Group exited).

The merger will make Grasim “one of India’s largest, well-diversified companies with a healthy mix of businesses with a steady cash flow and long-term growth opportunities," said Kumar Mangalam Birla, chairman of the Aditya Birla Group. He added that it also simplifies cross-holdings.

Although the Birlas hold their stakes in the group’s companies through a clutch of investment and holding companies, larger companies within the group, such as Grasim, Hindalco Industries Ltd and Aditya Birla Nuvo, also hold stakes in each other and in other group companies.

Birla added that with “diverse businesses spanning manufacturing and services, the combined entity provides a play on India’s growth story".

Shareholders didn’t agree. With news of the merger making the rounds for at least a few days ahead of the announcement, which came after market hours on Thursday, shares of Grasim took a beating. They ended at 4,538.95 on the BSE, down 6.44%, on a day the benchmark Sensex rose 0.31%.

ALSO READ | Will investors cheer or protest the Grasim-Nuvo merger?

Raj Balakrishnan, managing director, head, investment banking, at DSP Merrill Lynch Ltd, which was financial advisor to Grasim, said the deal enables the Aditya Birla Group to have three strong, growing businesses—cement, financial services and telecommunications.

“Aditya Birla Group has created three cash-generating businesses while Grasim Industries shareholders are getting direct exposure to fast growing companies through this composite scheme of arrangement," said Balakrishnan.

He said the financial services business has reached critical mass, adding that “it is the right time to reward shareholders".

A senior consultant, requesting anonymity, said the Aditya Birla Group has actually nullified cross-holding through this composite scheme of arrangement.

“Aditya Birla Group could have ideally created a trust to enhance cross-holding but it opted to cancel via this merger," said the consultant.

The transaction is likely to be completed by the fourth quarter of FY2017 or the first quarter of FY2018.

Kumar Mangalam Birla said Aditya Birla Nuvo had the size and scale for a demerger and the time was opportune to monetize the existing businesses so as to grow other businesses.

The big story of the merger is the emergence of Aditya Birla Financial Services as an important and diversified finance company and its future trajectory.

ALSO READ | Financial services company has come of age: Kumar Mangalam Birla

The group wanted a banking licence and ended up with a payments bank one.

“The demerger and listing of the financial services (company) will unlock value for shareholders," said Birla.

Ajay Srinivasan, chief executive officer of Aditya Birla Financial Services, said there is no plan to spin off the insurance business.

“The demerger will enable us to scout for newer growth opportunities," he said.

The listed financial services company will be 57% owned by Grasim after the merger. Grasim’s shareholders will own the rest.

Each shareholder of Nuvo will receive three new equity shares in Grasim for every 10 held. That means a shareholder with 100 shares of Aditya Birla Nuvo will end up with 30 shares of Grasim. And each shareholder of Grasim (post-merger) will receive seven shares in Aditya Birla Financial Services for each share held. That means a shareholder with 100 Grasim shares will also get 700 shares of the finance company.

ALSO READ | The rise of Aditya Birla Financial Services

In aggregate, each shareholder of Aditya Birla Nuvo who owns 100 shares will receive 30 shares in Grasim and 210 in Aditya Birla Financial Services.

The merger plan outlined on Thursday is subject to requisite approval from shareholders, creditors, courts and regulatory authorities.

DSP Merrill Lynch served as financial advisor to Grasim; Price Waterhouse and Co Llp & Bansi S. Mehta and Co. were the independent valuers; JM Financial Institutional Securities Limited provided an independent fairness opinion to Grasim and Kotak Mahindra Capital Co. to Aditya Birla Nuvo; Khaitan and Co was the legal advisor for the overall transaction; and Cyril Amarchand Mangaldas was the legal advisor for Aditya Birla Financial Services.

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