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Grasim Industries Ltd. - Aditya Birla Nuvo Ltd. Merger

Aditya Birla Group has, on 11-Aug-16, announced a composite scheme of arrangement between Grasim Industries Ltd. and Aditya Birla Nuvo Ltd. What caught my attention is probable spin-off of their FS business. This thread is created to discuss and understand opportunities/risk etc. this special situation offers and the best way to leverage upon this opportunity. Kindly pour in your views.

AB Nuvo’s CA on BSE
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=43527dde-7462-48fe-8c6e-e9ac7085b154

Aditya Birla Nuvo Ltd has informed BSE that the Board of Directors of the Company at its meeting held on August 11, 2016, have considered and approved a Composite Scheme of Arrangement between the Company, Grasim Industries Limited and Aditya Birla Financial Services Limited and their respective shareholders and creditors u/s Sections 391 to 394 of the Companies Act, 1956 [“the Composite Scheme"].

The Scheme is subject to necessary statutory and regulatory approvals including the approvals of the respective High Courts, the Stock Exchanges, SEBl, the respective Shareholders and lenders/ creditors of each of the companies involved in the Composite Scheme.

In this regard, the Company has issued a Press Release dated August 11, 2016 titled “Creating a premier play on India’s growth”.

Grasim’s CA on BSE
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=403d1e6c-8392-4860-a690-70cf6239c06f

As per the proposed scheme, The two companies, Grasim and Aditya Birla Nuvo (AB Nuvo), have entered into a two-way merger. The first step involves merging the two companies and the second would be a spin-off of the financial division.

For every 10 shares held, the shareholders of AB Nuvo will receive 3 shares of Grasim. Post-merger when the financial services business is spun off, the shareholders of the merged Grasim will receive seven shares of Aditya Birla Financial Services – the arm which holds the insurance and asset management companies.

The Street clearly is unhappy with the way the Grasim–Aditya Birla Nuvo merger has been announced. Their unhappiness is reflected in the share price of Aditya Birla Nuvo which is down 17.5% to Rs 1,288.
more to chew on this…

Demystifying Grasim-Aditya Birla Nuvo merger
(Analysts have openly voiced their concern over the deal aimed at helping the group’s telecom venture ahead of Reliance Jio’s launch)

Merger will give capital to high-growth biz: Kumar Mangalam Birla
(Interview with Chairman, Aditya Birla group)

Aditya Birla to merge Nuvo, Grasim
(The combined entity will have revenue of Rs59,766 crore; Nuvo unit Aditya Birla Financial Services to be listed)

Financial services company has come of age: Kumar Mangalam Birla
(Aditya Birla chairman Kumar Mangalam Birla on the proposed Nuvo-Grasim merger and the spinning off and listing of Aditya Birla Financial Services)

The rise of Aditya Birla Financial Services
(Over the decades, Aditya Birla Financial Services has grown into a Rs9,300 crore business, with a potential valuation upwards of Rs25,000 crore)

News in numbers | Aditya Birla Nuvo, Grasim merger to create Rs59,766 crore revenue firm
(Post merger, Grasim will become a more diversified firm)

Aditya Birla Nuvo, Grasim fall most in 8 years after merger announcement
(Aditya Birla Nuvo and Grasim shares saw their steepest single-day fall in 8 years in intraday trade as analysts, minority investors disapproved of the proposed merger)

Kindly share your views.

Disc: No Investments in any of these companies

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Will investors cheer or protest the Grasim-Nuvo merger?
(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)

Merger in Details

From above depiction, it seems that the promoters have cleverly increased their shareholding from 31.3% to 39%. Whether it is at the cost of minority shareholders, I am not sure.

Another point is there exists a clear arbitrage opportunity. For every 10 shares of ABNL, you will get 3 shares of Grasim and 21 shares of ABFSL. Present value of ABNL is 1245 and that of Grasim is 4520. So, effectively one would get the ABFSL shares (whenever they get listed) for free.

I could not get the standalone financials of ABFSL from ABN annual report. But following info is gathered -
=They are amongst top 5 in Mutual funds business,
=4th largest pvt insurer (will be 3rd post amalgamation of Max into HDFC Life)
=As for its NBFC, the numbers were very good–
1- Lending book grew yoy by 47%,
2- Revenue grew by 37%
3- Net profit grew by 51% (from 411cr to 626cr)
4- RoE 15.4%, RoA 2.1%
5- Gross NPA - 0.63%, Net NPA - 0.22%

Disc: Tracking and interested especially in the Financial services business looking at the large growth potential.

Hi all,
I’ve initiated a small position in the merger arb in which I am long Aditya Birla nuvo and short grasim (in derivatives market for the same value)

A merger share swap ratio of 10:3 suggests that the share price ratio of the two should be 3.33 but based on today’s closing prices of both ratio is at 3.64 (4523/1244)

So Aditya Birla nuvo appears to be cheaper - that plus the fact that it has fallen more than grasim after the merger announcement gives me some confidence to take this position - another point is that finance business appears to be on a firm footing now.

Views are invited, especially rebuttal opinions

Sachit

As per CA, Grasim and ABNL will be merged first and then ABFS will be spun off so I don’t think one would get it for free based on any arbitrage involved as such but yes, It’s value will be unlocked once it’s spun off post merger.

As per the link provided in my original post ABFS is 9300 cr. business and may be valued anywhere between 22K to 32K Cr.

As per following link it has AUM of 185,515 Cr. (Dec-15), Lending Book of Rs. 23,442 Cr. including housing (Dec-15) and Revenue of 7926 Cr. (FY-15) and has diversified portfolio with 12 lines of businesses. Based on this nos. above valuation looks ultra conservative to me.

http://www.adityabirlanuvo.com/Financial_Services_Overview.php

It would be interesting to try to figure out as to what price the merged entity would trade post merger applying the discount value to it’s holding structure and what valuation would be accorded to ABFS post listing.

There is an article in today’s Mint, couldn’t find the link so posting here verbatim from ePaper…

Billionaire Kumar Mangalam Birla’s group may sell a 5% percent stake in its financial services unit to help raise capital, providing a valuation gauge for a business it plans to list next year.

The $41-billion apparel-toaluminum conglomerate sees financial services as the next growth area with traditional businesses such as cement and chemicals expanding at a more subdued pace.

Securing cheaper financing for the lending unit was one of the key motivations behind a group restructuring, announced last week, that would combine Grasim Industries Ltd and Aditya Birla Nuvo Ltd into a company with $9 billion in revenue. The proposal triggered a stock rout in both the merging entities.

There is “a provision for raising some primary capital as part of the merger” between Grasim and Aditya Birla Nuvo, according to Saurabh Agrawal, Aditya Birla Group’s chief strategy officer. “For financial services, the requirement is capital. If somebody comes to us and gives us very attractive terms, then we will evaluate it.”

Ashish Adukia, head of group corporate finance, said that a ` 15,600 crore valuation for Aditya Birla Financial Services Ltd, estimated by Religare Capital Markets Ltd in an 12 August report, seemed low. He declined to comment further on the unit’s value.

The group is seeking to raise at least $200 million through the stake sale, according to people familiar with the matter, who asked not to be identified because the information is private. The unit will consider selling new shares to sovereign funds as well as private equity firms, according to Adukia.

The company may sell 5% “only towards the end of the merger scheme”, Adukia said. “It’ll be totally opportunistic, frankly.”

Credit growth at the financialservices business has increased to 27,730 crore as of March from 1,850 crore in 2011, Adukia said. The business needs access to ` 1,000 crore annually for a couple of years, he said.

Aditya Birla Nuvo has invested around 6,000 crore in the financial-services unit, while Birla has invested around 2,500 crore in the holding company, according to Adukia. The billionaire owner said on 11 August that a listing of the lending arm is expected by June.

The merged entity will have a 57% stake in the finance business, the owners will have a 17% stake and the rest will be held by the public, according to an 11 August presentation on Grasim’s website.

Grasim - AB Nuvo Merger Press Conference (dated 11/8/16)

Where should one invest now, Grasim or AB Nuvo, considering the merger of AB Nuvo and demerger of Fin. Services. Your feedback is appreciated!

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AB Nuvo is still cheaper by 5%

Grasim price times 1.5 / AB nuvo price -1 = 5%

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Any reports or any research on Grasim. Please share

Aditya Birla Capital ( the Resulting company from Grasim ).

30-June-2017 - Azim Premji bought 2.2% equity of Aditya Birla Capital (ABC) - Valuing mkt cap as 32K.
Earlier - Religare valued it at 16.5K ( got this info from one of earlier interview of management )

Total Equity = 215 Crore

Reverse calculation for share price of ABC,
Mkt Cap 32000 = Rs. 149
Mkt Cap 16500 = Rs. 77

No idea on adjustable share price of Grasim on ex-date !!

As there was murmur it is true that the Demerger Equity Exchange Ratio is not minority share holder friendly.

FYI - Aditya Birla Nuvo market cap as on today is 24K.

Disc : not invested as bit worry about ex-date adjustment of Grasim.

Hi All,
listing of Aditya birla capital today done.
pre split price-Grasim 1300

post split-grasim-1162 aditya birla cap-237
5:7 ratio of grasim : ABCL allotment
For 50 grasim shares. return would be-9486/65314=14.5 % in around 40 days.

Highlights from the management commentary

  • The management expects near term VSF margin to have peaked out as the price of pulp (a key raw material) has increased substantially.

  • Sale of the Fertilizer business should be completed by Sep’21 (earlier Jun’21).

  • The company plans to increase its epoxy capacity by 125ktpa via brownfield expansion at Vilayat, Gujarat. In the Chlor-Alkali business, it is planning ~200TPD brownfield expansion at Vilayat.

  • Capex guidance for FY22 (excluding the Paints and Fertilizer segment) stands at INR26b.

  • GRASIM is in the process of acquiring land for its Paints facility. It has not guided at capex allocation for the Paints business in FY22.