Birla’s $9 Billion Merger Plan Is Signal to Sell for Investors

  • Aditya Birla Nuvo to merge with Grasim Industries in rejig
  • Financial services unit to be separated, listed after revamp

Kumar Mangalam Birla.

Photographer: Udit Kulshrestha/Bloomberg

Aditya Birla Nuvo Ltd. headed for a record drop and Grasim Industries Ltd. shares slid as investors showed their disappointment in Indian billionaire Kumar Mangalam Birla’s plan to combine the two companies into a firm with $9 billion of revenues.

Birla on Thursday announced the merger of Grasim, which controls India’s biggest cement maker, and ABNL, that has stakes in companies from a mobile-phone operator to a life insurer. Grasim dropped as brokerages including HSBC Holdings Plc said the transaction burdened the company with unrelated businesses including Idea Cellular Ltd., which requires a lot of investment amid intensifying competition. ABNL shares slid as much as 25 percent.

“Grasim will become a dumping ground for new business verticals” for the founder, Emkay Global Financial Services Ltd. analysts led by Sanjeev Kumar Singh said in a research report on Friday. There is concern that “whenever Idea needs money, Grasim will support it as it has a strong balance sheet and there could further be increase in equity stake in Idea in this process.” They cut their rating on Grasim to reduce from buy.

Birla emphasized Thursday that the transaction wasn’t about bolstering Idea, India’s third-largest wireless operator, which is bracing for increased competition from billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. The new entity’s diversified holdings mean a “massive derating” for Grasim, which has so far benefited from the stable cash flows of UltraTech Cement Ltd., Suniil Pachisia, vice president at Pratibhuti Viniyog Ltd., said by phone.

Revamp Proposal

Grasim’s shares fell as much as 8.5 percent before trading at 4,497.65 rupees in Mumbai as of 10:26 a.m. on Friday, while ABNL was 18 percent lower at 1,282.5 rupees. The benchmark S&P BSE Sensex rose 1 percent. Idea has been the worst performer on NSE Nifty 50 index this year.

The revamp proposal, which needs approval from shareholders, lenders and court, is expected to be completed by June 2017. The combined entity, which Birla called “new Grasim” with five lines of business -- financial services, telecom, cement, textiles and chemicals - will have about 600 billion rupees ($9 billion) in revenues and 40 billion rupees in net income.

“This transaction is really not about Idea,” Birla said in an interview in Mumbai on Thursday. “The new company will have about 25 percent of Idea, so it will not be responsible for the debt of Idea or fundraising. Idea has access to funds on its own.”

For every 100 shares in Aditya Birla Nuvo, an investor will get 30 shares of Grasim and 210 shares of Aditya Birla Financial Services Ltd., according to a presentation filed with the exchanges. A shareholder with 100 shares in Grasim will get 700 shares of the financial services unit, according to the presentation.

Ambani’s Jio has already spent 1.5 trillion rupees in setting up its wireless unit. India’s government expects mobile-phone companies such as Idea to bid for airwaves in an auction in September. The government expects to raise 5.56 trillion rupees from the sale.

“Grasim shareholders get an exposure to fast-growing telecom and financial services businesses while Nuvo shareholders get the benefit of stable cash flows from cement and viscose fibre businesses,” Birla said at a briefing on Thursday. Shareholders can choose whether they want to buy into the larger holding company or sector-specific entities, he said.

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