The analysis of JP Associates in The Compass, December 24, 2008 was based on conjecture. While the analysis says “the merger ratio implies an outflow of approximately Rs 700 crore from JP Associates”, we would like to categorically state that the proposed amalgamation does not at all involve any outflow of funds.
The valuation of business/shares of a company has been done scientifically, involving a combination of various methods including price-earnings capitalisation value method, net asset value method, and market value method. The price-earnings multiple is not the only criterion which is taken into consideration. If you had considered the assets base of Jaiprakash Enterprises, you would not have concluded that JP Enterprises has been “valued expensively”. The valuation was done by a renowned firm of chartered accountants who went by not just the profitability but also the asset base of the respective companies, apart from the other methods mentioned earlier.
With reference to the statement that the merger of the two subsidiaries — Jaypee Cement and Gujarat Anjan Cement — “will not affect the earnings”, we would like to state that Phase-I of the cement plant of Gujarat Anjan Cement at Bhuj with an annual capacity of 2.5 million tonnes is expected to be commissioned by March, 2009, to be followed by Phase II of another 2.5 million tones. Similarly, the four million tonne per annum capacity cement plant of Jaypee Cement is under implementation. Can anybody believe that the merger of these two companies “will not affect the earnings” of the merged entity?
Surprisingly, while quoting the ratio of 1:1 for the merger of JP Associates with JP Hotels, the face value of both the shares is not mentioned. While the face value of each share of Jaiprakash Associates is Rs 2, that for Jaypee Hotels is Rs 10. Thus for every share of Rs 10 in Jaypee Hotels, its shareholders will get one share of Rs 2 only in Jaiprakash Associates. Simply mentioning the ratio of 1:1 gives the wrong impression. Another strong point of the scheme — the transfer of cross-holdings to the trusts for the benefit of the company, instead of cancelling the same — has been overlooked.
Our proposal has been linked to the completely different Satyam incident. That transaction involved an outflow of around Rs 6,000 crore while ours is an absolutely cashless transaction leading to the merger of group companies on the values suggested by an independent valuer. JAL’s proposal is subject to various approvals including those of shareholders, creditors, a number of regulators and finally subject to the sanction of the scheme by the high court.
n The proposed amalgamation will lead to an increase in JAL’s share capital by only 220 million shares of Rs 2 each with a corresponding increase in its assets base by Rs 987 crore.
n To prepare JAL for a fast-changing and unexpected scenario in the financial world, the promoters have diluted their own holdings as a result of the merger in order to protect the interests of the shareholders.
Given this, the statement that “even after the Satyam incident, managements, it would seem, are not too concerned about what their shareholders feel” is an irresponsible one.
Harish K Vaid
Sr President (Corporate Affairs) & Company Secretary
Jaiprakash Associates Ltd
