No premium to Birla, Sebi tells Heidelberg

The Securities and Exchange Board of India (Sebi) has asked German cement maker Heidelberg Cement AG to acquire shares of Mysore Cements from the Indian promoters, the SK Birla group, at the same price at which it bought shares from public shareholders during the recently-concluded open offer.

Following this order, Heidelberg Cement will need to pay only Rs 58 per share, instead of the earlier agreed Rs 72.50 apiece. This 25 per cent premium was agreed as a "non-compete fees" to the Indian promoters when the German major took majority control in Mysore Cements in 2006.

Sebi said it did not find merit in the non-compete fees arrangement as the "sellers/promoters to whom non-compete consideration has been paid consist of trusts and charitable institutions."

Also, the existing promoter group (other than the sellers) continues to be represented on the board of the target company, even after the acquisition. "The sellers were part of the promoter group of the target company when it had been a sick company and they could not revive the affairs of the company. It was only after infusing funds by the acquirers that the target company was revived and came out of the reference of Board for Industrial and Financial Reconstruction," said the order, a copy of which is with Business Standard.

Sebi said these peculiar facts clearly suggest that the sellers cannot be considered competitors in the same line of business as that of the target company.

Therefore, the payment of Rs 14.50 per equity shares of non-compete consideration to the sellers is not covered by the regulation as a non-compete consideration and is not justified.

Importantly, the regulator said its order on Mysore Cement's case "is only in respect of this case and will not be treated as precedent for other cases."

In November, the Securities Appellate Tribunal (SAT) had set aside the capital market regulator's order asking Heidelberg to increase its open offer price for Mysore Cements by 25 per cent, after the German company challenged Sebi's interim order.

SAT had asked Heidelberg to go ahead with the open offer, but asked the company to put the extra amount it was to pay to the SK Birla family in an escrow account.

In a uniquely structured deal in July 2006, Mysore Cements had announced that it would allot up to 66.5 million equity shares representing a 42.08 per cent stake to Heidelberg on a preferential basis at Rs 54 apiece.

Also, Heidelberg would buy 13.40 million shares amounting to a 8.48 per cent stake from the promoter group for Rs 58 per share, excluding non-compete fees of Rs 14.50 per share.

Payment of non-compete fees is not uncommon in mergers and acquisitions in India. Early in 2005, Holcim paid Rs 90.64 per share in an open offer to the shareholders of Gujarat Ambuja Cements, while it paid Gujarat Ambuja's promoters Rs 105 per share, with the extra Rs 14.36 per share being labelled as non-compete fees.