Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Indian billionaire Kumar Mangalam Birla overestimated investors' tolerance for complexity, and ended up destroying more than $700 million of shareholder value over just two trading days this month.

Value Destruction
The market capitalization of two Birla companies has fallen by more than $700 million on merger plans
Source: Bloomberg

With his team now doing a better job of explaining the rationale behind a confusing marriage of two group companies, the lost wealth stands a good chance of being recouped. What may be irretrievably gone, though, are the voting rights that some minority investors are being asked to sacrifice.

Birla's justification last Thursday for the merger of Grasim Industries and Aditya Birla Nuvo was that the former had plenty of free cash flow, thanks to its cement and viscose staple fiber businesses, while the latter was exposed to fast-growing industries like telecom and finance. Together, the combined entity would offer a blend of growth and stability. Two of those businesses -- cement and telecom -- already have separate listings. After financial services are spun off via an IPO, investors would have a choice of owning either the operating entities or the holding company.

While the description was accurate, it still managed to spark a rush for the exits among investors of both Grasim and Nuvo, despite most equity analysts concluding that the proposed share swap is fair.

The reason for the nervousness? Apart from the usual concerns about a holding-company discount, Grasim investors probably loathed the idea of being partly on the hook for mobile operator Idea Cellular's debt. With the price war in India's telecom sector turning brutal, that anxiety is justified.

Final Holding Structure

birla cropped

But funding telecommunications with Grasim's cash isn't the plan -- at least for now. Birla's team did well to explain that financial services, currently a wholly owned subsidiary of Nuvo, would be better off with higher-rated Grasim's balance sheet backing its future expansion.

That makes sense. India's state-run banks are too capital-starved to finance new assets. And while large diversified conglomerates such as Birla won't be allowed by the monetary authority to run their own fully fledged banks, there will plenty for them to do as financiers, asset managers and insurers. Both Grasim and Nuvo shares stabilized Wednesday.  

Even so, there are question marks around the deal's lopsided structure. For one, Birla and related parties get to own 39 percent of an enlarged Grasim, and would eventually control an additional 17 percent in financial services. Throw in merged Grasim's 57 percent ownership of this sunrise business, and the main shareholders would effectively lord over 74 percent of its voting rights, according to proxy researcher InGovern.

In a full demerger, the Birlas would have controlled no more financial services than the 39 percent they would own in a merged Grasim. For all practical purposes, the partial demerger appears to give the controlling shareholder privileges in excess of what it has paid for.

South Korean chaebols' web of cross-shareholdings allowed founders to control large empires with little equity. Billionaire Birla's double-dipping isn't in the same league. But it does make for a less-than-pleasing sight.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Each shareholder of Nuvo with 100 shares will receive 30 shares of Grasim upon the merger and 210 shares of Aditya Birla Financial Services (ABFS), after the latter is listed. As for shareholders in pre-merger Grasim, they will receive 700 shares of ABFS for every 100 shares owned.

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