Wipro demerges business, to form a new non-IT firm

Having run a mix of new- and old-economy businesses under one umbrella so far, Wipro Chairman Azim Premji has decided to separate them. The move is aimed at extracting the best out of those businesses.

The Wipro board has approved the separation of the non-IT businesses from Wipro Ltd to form a new company, Wipro Enterprises Ltd. The new unlisted entity will include Wipro Consumer Care & Lighting, Wipro Infrastructure Engineering and Medical Diagnostic Products & Services (through a strategic joint venture with GE).

In the financial year 2011-12, the IT business accounted for about 86 per cent revenue and 94 per cent operating profit of Wipro Ltd. “I am confident the demerger will enhance value for our shareholders, and provide fresh momentum for growth. Each of our distinct businesses is the best of breed in its respective industry, and we are committed to both the businesses,” Premji said in a statement.

“The decision was triggered by the fact that non-IT businesses have now reached critical mass, and if we wait for some more time, it will not be possible for us to segregate these businesses,” said N Vaghul, independent director on the board of Wipro.

The company said the board and management structure of Wipro Ltd would remain unchanged. There will be no impact on Wipro Enterprises Ltd’s constituent business either. Premji will continue to be the executive chairman of Wipro Ltd whereas he would assume the role of non-executive chairman in Wipro Enterprises Ltd.

What this means for Wipro Ltd

• Wipro Ltd can claim it is a pure-play IT services company, with interests only in IT services, products and BPO
   
• Profitability to rise as IT business margins are higher than non-IT
   
• It will dispel confusion among investors, clients and possible acquisition targets, as the company will no more be questioned about its exposure to non-IT businesses
   
• The demerger may also help promoter (Azim Premji) to reduce holding in Wipro Ltd by up to 2.7%

What it could mean for Wipro Enterprises Ltd

• All businesses will get scope to take independent decisions
   
• Diversification into new areas will be easier for unlisted entity
   
• It will have a new board of directors after the demerger

Wipro has given three options to shareholders. Under the first, the Indian shareholders may opt to receive one equity share with a face value of Rs 10 in Wipro Enterprises Ltd for every five equity shares with a face value of Rs 2 each in Wipro Ltd. They can also opt to receive a seven per cent redeemable preference share in Wipro Enterprises Ltd with a face value of Rs 50 for every five equity shares of Wipro Ltd. Lastly, they can opt to exchange equity shares of Wipro Enterprises Ltd and receive as consideration equity shares of Wipro Ltd held by the promoter. The exchange ratio will be one equity share in Wipro Ltd for every 1.65 equity shares in Wipro Enterprises Ltd.

The third option may help the company reduce the promoter’s shareholding up to 2.7 per cent. Assuming that 100 per cent of the investors decide to stay invested in Wipro Ltd, the promoter (Azim Premji’s) shareholding in Wipro can come down to 75.7 per cent, quite close to meeting the Sebi-mandated 25 per cent minimum public shareholding.

Premji currently holds about 78.2 per cent in Wipro Ltd. Suresh Senapaty, CFO and executive director of Wipro Ltd, said the company had initiated the process to bring down promoter holding below 75 before the June 2013 deadline. The demerger will be with retrospective effect from the opening of business hours on April 1, 2012. The company expects the process to be completed by the next financial year, subject to court and regulatory approvals.