Integrated sugar conglomerate EID Parry Ltd has made an open offer to acquire 20% of the publicly held shares of GMR Industries Ltd at Rs110.70 apiece. This follows the agreement between the two companies that EID will acquire a majority stake of not less than 51% and up to 65% in GMR at Rs57.40 a piece.

GMR owns three integrated sugar complexes with a crushing capacity of 11,000 tcpd that can generate 46MW of power and with a distilling capacity of 95 kilolitres per day. The buy will give EID access to newer regions in Andhra Pradesh and Karnataka and increase its integrated capacity.

Analysts peg GMR’s business value at around Rs480-500 crore. However, the enterprise value of the company (market value of equity plus debt on books) is around Rs700 crore. Incidentally, debt (long-term, short-term and working capital loans) as on 31 March is around Rs500 crore. Analysts, therefore, reckon that the acquisition comes at a premium. This is perhaps why EID shares closed marginally lower at Rs364.8 each. In fact, during fiscal 2010, GMR registered a net loss of around Rs58 crore on revenue of Rs227.6 crore. This could also be the reason for the wide gap in the price offered to buy out the promoters versus the public shareholders.

Of course, the EID management justifies the higher valuation on the ground that there is a gestation period for new integrated units. Besides, GMR comes with a developed cane area under its command, good water availability and access to new sugar markets. A senior EID spokesperson says that soon after the company becomes a subsidiary of EID, the management will restructure the high debt on its books.

The one point of concern is that the acquisition comes at a time when the sugar cycle has just reached its peak. EID has in the past been less affected by cyclical downturns than its peers due to its interests in farm and agri-products through other subsidiaries. During fiscal 2010, it registered an earnings per share of Rs23 on a stand-alone basis, and Rs45 on a consolidated basis.

Shareholders of GMR will do well to cash in on the open offer or perhaps even exit at the current market price of Rs117.

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