Merger a win-win, says Birla group

Management believes financial services business will get major boost; Idea will be a small part of Grasim and is self-sufficient to raise funds

Stung by market concerns over the merger of Aditya Birla Nuvo (ABNL) and Grasim Industries, the top management of the Aditya Birla Group on Saturday said the deal had many benefits which seem to have been overlooked. The ABNL stock lost 17 per cent while Grasim remained flat on Friday — a day after the announcement of the merger.  

Speaking to Business Standard, Saurabh Agarwal, chief strategy officer of the group and Ashish Adukia, head-corporate finance, said the merger would lead to textiles and chemicals coming together as common businesses. Besides the new firm would have a more diversified structure with multiple growth drivers. They added that Grasim's viscose staple fibre and ABNL's viscose filament yarn would bring synergies and the case would be similar for some other businesses too.

Adhukia and Agarwal said Grasim already had large verticals and growth rates would not have improved without adding new verticals. Grasim would benefit from growth in various verticals, particularly financial services, and will be incubating more new businesses that will accrue further benefits. They were responding to investor concerns that the merged entity would become more complex. Grasim already had textiles, chemicals and cement (being the holding company of UltraTech) verticals, while ABNL is present in financial services, telecom (shareholding in Idea), textiles and chemicals.

Adukia and Agarwal said ABNL had been incubating new businesses. However, ABNL, with a smaller balance sheet, would have limitations to grow businesses, while Grasim would be able to drive growth better.

The Birla management team said the merger would drive the growth of the financial services business, which has attained critical mass. The business has grown substantially and has large funding requirements and looking at the valuation multiples industry peers are trading at, the financial services business has big scope for growth. Shareholders of the proposed merged entity would get shares in Aditya Birla Financial Services, which would be listed next year, while the parent would hold 57 per cent in the subsidiary.

Thus to meet these requirements the larger parent with stronger balance sheet would mean better credit ratings too and in turn lower cost of borrowing. The cost of funding will come down significantly (25-50 basis points or about Rs 150 crore) alone by credit ratings getting revised from AA to AAA after the merger, while growth will be much faster, said Adukia

Another concern for the Street was about the telecom vertical. Shareholders have been sceptical that the merger was to finance Idea Cellular at a time when large capex is lined up to face the stiff competition from Reliance Jio. Investors are also worried that returns would be low from telecom and also dilute benefits that may have been seen by Grasim from the cement business.

ALLAYING CONCERNS

Concern 1: The merged entity will be more complex
MANAGEMENT RESPONSE:

• New company to have more diversified structure with multiple growth drivers
• Synergy between textiles and chemicals businesses of Grasim and ABNL

Concern 2: New entity will heavily invest in Idea Cellular

MANAGEMENT RESPONSE:

• Idea is a separately-listed entity and is capable of raising funds on its own
• Idea will be only 9 per cent of the merged entity’s sum-of-the-parts valuation

Concern 3: What are the benefits of amalgamation?
MANAGEMENT RESPONSE:

• Financial services business has attained critical mass and has large funding requirements
• Better credit ratings to larger parent with stronger balance sheet will lower cost of borrowings significantly (25-50 basis points)
• Grasim to help in driving growth for recently incubated new businesses of ABNL

Adukia said that Idea is a separately listed entity and is capable of raising funds on its own.  He added that after meeting the current capex requirement, the future requirement would be lower. Also, Idea will be only about nine per cent of the merged entity’s sum-of-the-parts valuation pointed out the management; while cement would come down from 70 per cent to 60 per cent and hence continue to accrue benefits.

The management also said it had explored a number of options before arriving at the amalgamation route. The Street has been talking of carving out financial services from ABNL directly and listing it as was the case with Aditya Birla Fashion and Retail. However, Adukia and Agarwal said that the benefits of a large parent, and lower cost of funds to grow business faster would have been defeated. Besides, this proposed structure also nullifies the group cross-holdings that were present earlier.   The market was also worried that holding companies trade at a discount to their sum of parts valuation. However, the management said that Grasim and Nuvo have had subsidiaries and the holding company discount has existed in both cases.  Under the proposed scheme, Grasim shareholders will get direct access to the financial services business. With the financial services business getting listed separately, there would not be any holding company discount.