Avantha seeks $300 mn for consumer arm stake

Promoter likely to sell 35% stake for Rs 80 a share to private equity firm Advent; analysts value it at Rs 131 a share

Gautam Thapar-owned Avantha Group is close to selling 35 per cent stake in its consumer durables arm to private equity firm Advent for $300 million (Rs 1,860 crore), the Financial Times reported from New York, citing sources it did not identify.

At this level, the Advent transaction is valuing the consumer durables company at $857 million (Rs 5,375 crore), far lower than market estimates.

An Avantha spokesperson said: "As a policy, the Avantha Group does not comment on rumours."

An analyst said on condition of anonymity: "We value the consumer business at Rs 8,500 crore, at 20 times its FY17 earnings or Rs 131 a share. Anything less than that [valuation] will be a disappointment."

The transaction with Advent is valuing the consumer business at Rs 80 a share, though an official announcement from Crompton Greaves is still pending. The sale to Advent will trigger an open offer for the consumer durables arm as the company will be listed separately after its demerger with Crompton Greaves, effective October last year.

"The valuation may seem low as Advent is not paying any control premium for buying 35 per cent stake," said P Phani Sekhar, fund manager with Karvy. "But looking at the way the economy is growing, no one will pay 25 times earnings unless the company is being taken over by a rival like Havells, who has to pay a control premium."

Avantha will use the proceeds of the sale to retire its $250-million debt, owed to private equity companies, KKR and Apollo. As the repayment date for the loan is nearer, the stake in the consumer durables firm is likely to be sold at a lower valuation, said a banking source.

On Wednesday, Crompton Greaves fell 1.12 per cent to Rs 172 a share on the BSE exchange. The stock has lost 21.36 per cent in the last six months, with its current market capitalisation at Rs 11,027 crore. Earlier this month, the group sold its Korba power project to Adani at a valuation of Rs 4,200 crore. Crompton Greaves held 23.4 per cent stake in the Korba company.

The Crompton Greaves board of directors demerged the consumer business last year for a possible sale. But on March 3, the company said based on comments received from the Securities and Exchange Board of India (Sebi), stock exchanges and small investors its board reconsidered the proposal and decided to implement a 100 per cent demerger of the consumer products business, in a manner that the shareholding pattern of the resulting consumer company exactly mirrored the shareholding pattern of Crompton Greaves (see chart).

According to its earlier plan, Crompton Greaves was planning to retain 26 per cent stake in the consumer durables business while the promoter, the Avantha Group, was getting 25.8 per cent. After the demerger now, the Avantha Group will hold 35 per cent stake in the company, while Crompton Greaves will not hold any stake.

"The demerger opens all options for easy entry of any strategic player in the consumer business as the promoter group, Avantha Group, will target to exit the entire consumer business. The change in ownership with no presence of Crompton Greaves as holding company will be easier. Hence, a better value proposition for minority shareholders of the consumer business as well in future," said an analyst with B&K.

The consumer durables business' revenues grew a tenth to Rs 2,847 crore in 2013-14 from Rs 2,593 crore in 2012-13, becoming a fit case for demerger. The consumer durables business made a profit before interest and tax of Rs 337 crore, up 21 per cent.