Session1 Kumarmanglam Vijay

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Unlocking Value through - Demerger and Slump Sale06 April 2011

Kumarmanglam Vijay

ContentsReorganization tools: A snapshot Demerger Concept Slump sale Concept Why Demerger / spin offs - Case studies

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Unlocking Value through - Demerger and Slump Sale

Reorganization tools: A snapshotToolMerger

Business objectiveConsolidation of businesses / entities

Reorganization of BUSINESS

De-merger/ hive - off

Divest non-core business

Acquisitions

Acquiring interest in new business/ entity Enhancing stake / capital repatriation Financial restructuring Enhancing stake / repatriation Enhancing stake / delisting

Equity buy backReorganization of CAPITAL

Capital reduction

Public offer

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Unlocking Value through - Demerger and Slump Sale

Demerger Concept

Transferor Company to demerge its Business B to the Transferee company through a scheme of arrangement under a High Court driven process under section 391-394 of Companies Act, 1956 In consideration, company which acquires business (resulting company) issues shares to shareholders of selling company (de-merged company) Segregation of business verticals into independent entities ROCE, RONW separately captured for each business Market / regulator perception friendly Automatic listing of Transferee Company Demerger to be tax neutral provided prescribed conditions are fulfilled

TransactionShareholders of transferor companyConsideration in form of shares of resulting company

Pros

Transferor CompanyBusiness A Business B Demerger of business B

Transferee Company

Cons

Post demerger scenarioShareholders

Limited leveraging capacity on demerger of listed entities Twin listed entities Classical demerger requires transferee to reflect assets at book valueTransferor Company Business A

Transferee Company Business B

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Unlocking Value through - Demerger and Slump Sale

Slump sale Concept

Seller company to transfer Business B as a going concern to the Buyer company on slump sale basis In consideration, the buyer company can issue shares / pay cash to Seller Mode of transfer can be :

Shareholders of Seller company

Shareholders of Buyer company

Business Transfer Agreement Scheme of Arrangement u/s 391-394 of Companies ActConsideration

Pros

Maximum opportunity for leveraging stake for raising funds Segregation of business verticals into independent entities ROCE, RONW separately captured for each business Recognition of purchase consideration in value of assets in Buyers books Shareholders perception Step down of business assets Transaction chargeable to capital gains tax No flexibility to determine date of transfer To be effected from the current date (in case of BTA) Automatic listing of Buyer Company Not possible

Seller CompanyBusiness A Business B Slump sale of business B

Buyer Company

Cons

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Unlocking Value through - Demerger and Slump Sale

Why Demerger / spin offs

1. Focus on core competencies / Recapitalization 2. Facilitate strategic investment 3. Unlocking shareholder value 4. Regulatory reasons 5. Settling family agreements 6. Divestment 7. Streamlining groups business operations 8. Hiving off non core assetsNote: Case studies discussed in the subsequent slides are based on publicly available information

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Unlocking Value through - Demerger and Slump Sale

Focus on core competencies Bajaj AutoPre - Demerger structurePromoter Group 30% 68% Public

Bajaj Auto

Public

0.05%

Allianz49% 24% Maharashtra Scooters Bajaj Auto Holdings 100% 74% 26% 50%

Allianz50% 74%

Allianz26%

Allianz Bajaj Life Insurance Company

Bajaj Allianz Financial Distributors

Bajaj Allianz General Insurance Co

Public

Public6% 95% PT Bajaj Auto Indonesia 9% Bajaj Hindustan 57% 4% ICICI Bank

38% 5%

50% Bajaj Auto Finance

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Unlocking Value through - Demerger and Slump Sale

Focus on core competencies Bajaj AutoSplit Mechanics

Bajaj Auto incorporated two wholly owned subsidiaries & pre capitalized them to the extent required: Bajaj Holdings and Investment - Rs 43.5 cr (4.35 cr shares @ Rs 10) Bajaj Finserv - Rs 21.75 cr (4.35 cr shares @ Rs 5)

Bajaj Auto demerged identified businesses in the following manner: Bajaj Holdings and Investment

Bajaj Finserve

2-wheeler and 3-wheeler business Investment in PT Bajaj Auto Indonesia Cash

Wind power business Investment in Bajaj Auto Finance Limited Investment in insurance business Cash

Bajaj Auto retained remaining assets and liabilities, investments and balance cash and cash equivalents Scheme of arrangement provided for:

Issuance of shares to the share holders of Bajaj Auto in the ratio of 1:1 Such that post demerger, Bajaj Auto continue to hold 30% stake in respective companies with balance being held by shareholders of Bajaj Auto in proportion of their holding

Bajaj Auto to be renamed Bajaj Holdings and Investment Ltd BHIL (New) Bajaj Holdings and Investment Ltd to be renamed Bajaj Auto Ltd BAL (New)Unlocking Value through - Demerger and Slump Sale

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Focus on core competencies Bajaj AutoPost restructuring

Promoter Group 30% 68%

Public

Bajaj Holdings India Limited

48%

21% 30% Bajaj Auto Ltd. 30% Bajaj Finserv Limited

48%

21%

2-wheeler and 3-wheeler business Investment in PT Bajaj Auto Indonesia Cash

Wind power business Investment in Bajaj Auto Finance Limited Investment in insurance business Cash

1Was known as Bajaj Auto Ltd. Before restructuring 2 Was known as Bajaj Holdings and Investments Ltd.

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Unlocking Value through - Demerger and Slump Sale

Facilitate strategic investment Volvo & Eicher Motors

Swedish major AB Volvo and commercial vehicle producer Eicher Motors Limited proposed to enter into a joint venture dealEML Volvo

54.4% Slump sale of Commercial Vehicle business

45.6%

Key parameters

Investment in an Unlisted company Efficient utilization of cash invested for future growthJV Co

Eicher Motors Limited (EML) transferred its Commercial Vehicle and Components & Engineering Design Services business, to its step down unlisted subsidiary (JV Co) on a slump sale basis

Volvo subscribed to shares of JV Co for USD 275 million cash consideration and demerged after sales services division of its wholly owned subsidiary (worth USD 75 million) to JV Co.

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Unlocking Value through - Demerger and Slump Sale

Unlocking shareholders value Cadila HealthcareBegin structure

End structurePromoter

Demerger of Consumer Product Division (CPD) from Cadila Healthcare Ltd. CHL to Carnation Nutra Analogue Foods Ltd. CNAFL; andPromoter100%

PublicZHMRPL74% 72%% 28

Public% 26

Merger of ZHMRPL into CHL Date04 Jul 2008 18 Sep 2008 23 Oct 2008 05 Jan 2009 04 Feb 2009 20 Feb 2009 02 Mar 2009

CHLPharma

Key eventCHL Board approval for Scheme Shareholders and creditors approval for Scheme High Court approval for the Scheme Record date for demerger Amalgamation record date Listing of CNAFL shares issued on demerger Listing of CHL shares issued on mergerCPD

CHLPharma

Public% 29

Public71%

62%% 38

CNAFLCPD

CNAFL*CPD

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Unlocking Value through - Demerger and Slump Sale

Unlocking shareholders value Cadila HealthcareGraph showing movement in market cap of CHL vis--vis Sensex and Healthcare index

Board meeting

Listing

Particulars CHL (Rs. cr) Sensex Heathcare Index

5-May-08 3,730 17,491 4,296

5-Jun-08 3,707 15,770 4,346

4-Jul-08 3,930 13,454 4,123

18-Sep-08 4,020 13,316 3,814

1-Dec-08 2,889 8,840 2,840

2-Mar-09 5,677 8,607 2,586

1-Sep-09 6,153 15,551 3,847

31-Mar-10 11,261 17,528 5,328

1-Jun-10 12,635 16,572 5,489

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Unlocking Value through - Demerger and Slump Sale

Unlocking shareholders value Cadila HealthcareGraph showing movement in market cap of CNAFL vis--vis Sensex and Healthcare index

Board meeting

Listing

Particulars CNAFL (Rs. cr) Sensex Heathcare Index

5-May-08 54 17,491 4,296

5-Jun-08 54 15,770 4,346

4-Jul-08 52 13,454 4,123

18-Sep-08 56 13,316 3,814

1-Dec-08 34 8,840 2,840

20-Feb-09 254 8,843 2,596

1-Sep-09 676 15,551 3,847

31-Mar-10 1,491 17,528 5,328

1-Jun-10 1,844 16,572 5,489

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Unlocking Value through - Demerger and Slump Sale

Regulatory Reasons Zee TelefilmsIndian promoters 24% Foreign Promoters 23% Balance (including public) 31% 22%

FII

Zee Telefilms

News business

DTH business

Cable business

Only 26% total foreign equity shareholding allowed in News business Only 49% total foreign equity shareholding allowed in Cable business & Direct to home (DTH) business

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Unlocking Value through - Demerger and Slump Sale

Regulatory Reasons Zee TelefilmsCable and DTH business

Cable and DTH business of Zee were demerged into two separate companies

Shareholders

Part of the foreign promoter holding in the new company was transferred to Indian promoters to meet regulations

News business

Zee News Ltd

Wire & Wireless

ASC Enterprise

News business of Zee was demerged into a