Brokerage bullish on Crompton over Butterfly merger proposal, sees 49% upside in stock
2 min read 29 Mar 2023, 03:40 PM ISTAs part of the deal, the public shareholders of Butterfly as of the record date will receive 22 equity shares of Crompton for every 5 equity shares held by them in Butterfly. Post the completion of the merger, the public shareholders of Butterfly will hold a 3% stake in the combined entity.
PremiumCrompton Greaves Consumer Electricals is likely to benefit more from acquiring Butterfly Gandhimathi Appliances. The two consumer durables companies have entered into a share swap agreement where Butterfly will merge with Crompton. Brokerage expects the deal to be positive for Crompton's shareholders as the company will optimally realise the synergy benefit.
As part of the deal, the public shareholders of Butterfly as of the record date will receive 22 equity shares of Crompton for every 5 equity shares held by them in Butterfly.
Post the completion of the merger, the public shareholders of Butterfly will hold a 3% stake in the combined entity.
According to JM Financial, this merger is positive for Crompton shareholders as --- it can optimally realise the synergy benefits; and the valuation multiple is better. The brokerage value Crompton at 35x vs 32x for Butterfly.
Further, the brokerage believes that this is a step in the right direction though it happened earlier than expected, as Crompton had just offloaded a 6% stake in Butterfly in September last year, at ₹1,510 per share and the stock had corrected since then.
On BSE, Buttefly stock ended at ₹1,222.25 apiece marginally down on Wednesday from the previous closing.
On the other hand, for Butterfly, the brokerage believes it is for minority shareholders of the company.
In its note, JM Financial said, "we note that it is negative for minority shareholders of Butterfly, prima facie/optically, given a) stock price has corrected 16% since the OFS by Crompton and significant EPS accretion was expected to accrue into the Butterfly entity given sales growth and operating margin expansion (now being camouflaged into Crompton earnings), b) earlier expectation of de-listing related premium to CMP has now disappeared in view of the stock merger through the disclosed swap ratio."
On Crompton, JM Financial said, "as the merger is subject to approvals (expected to be completed by end-FY24), we do not change our estimates at present. We maintain our Mar’24TP of ₹435, basis SoTP valuation."
Crompton Greaves' share price closed at ₹292 apiece down by 1.07% on BSE. Its market cap is nearly ₹18,571 crore.
Taking into consideration JM Financial's target price and current market price, then there is a potential upside of 48.97% in Crompton.
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