Birla Wants to Feed Financial Services ‘Animal’ With Merger Plan

  • Financial services unit seen getting access to cheaper funds
  • Grasim shareholders to get benefits of high growth businesses

Indian billionaire Kumar Mangalam Birla’s group said the proposal to merge two companies and spin off its financial services division will help it cut funding costs and boost its lending business.

Combining Grasim Industries Ltd., which controls India’s biggest cement maker, and Aditya Birla Nuvo Ltd., followed by a planned spinoff of Aditya Birla Financial Services Ltd. would help the non-banking unit expand, Ashish Adukia, head of group corporate finance, said in an interview on Monday.

Birla is targeting financial services as the next growth market after acquisitions helped the group’s cement and chemicals businesses scale up. The financial services unit, which has received as much as 60 billion rupees ($897 million) of investment from the parent, will need further funds as new technologies and an accelerating economy boost the market for loans, insurance and mutual funds in the world’s second-most populated nation.

“We need to grow” the financial services business, which needs 10 billion rupees annually for the next couple of years, Adukia said. “That animal, we cannot stop feeding.”

The group has been reaching out to investors to explain the rationale of the merger after brokerages from HSBC Holdings Plc to IDFC Securities Ltd. cut their recommendations on Grasim saying the combination would leave the combined entity with non-core businesses.

Worst Performers

Shares of Aditya Birla Nuvo, which has stakes in companies from a mobile-phone operator to a life insurer, plunged the most in eight years on Friday, while Grasim dropped 13 percent last week. The pair tops the list of worst performing stocks on the S&P BSE 200 Index in the past five trading days.

Including the financial services business within Grasim is important because if the “market isn’t giving the right valuation, then Grasim, the new parent can step in,” Adukia said. The cost of debt “would come down by 25 to 50 basis points as Grasim has a AAA rating compared with AA+ enjoyed by Aditya Birla Nuvo,” he said.

Credit growth at the financial-services business has increased to 277.3 billion rupees as of March from 18.50 billion rupees in 2011, Adukia said.

"Grasim currently has businesses which are very large and the rate of growth of these cannot be as high,” Sushil Agarwal, group chief financial officer of the Aditya Birla Group, said on Monday. “It needs access to high growth business.”

Aditya Birla Nuvo’s shares, which dropped 17.4 percent on Friday, extended the decline on Tuesday and were down 3.9 percent at 12:36 p.m. in Mumbai. Grasim fell 2.2 percent. The benchmark S&P BSE Sensex dropped 0.5 percent.

“Potential exposure to non-core businesses due to the merger and lack of material synergies is likely to remain an overhang for the stock,” HSBC analysts Rajesh Lachhani and Jigar Mistry wrote on Friday, cutting their rating on Grasim to hold and increasing the holding-company discount from 20 percent to 30 percent.

Investors were also concerned that the merger was part of a plan to bolster the group’s wireless unit Idea Cellular Ltd., which Birla denied. Idea is bracing for increased competition from billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. and upcoming airwave auctions in which the government hopes to raise a record 5.56 trillion rupees from debt-laden phone carriers.

“While management clearly stated that capital allocation or support to the telecom business was not a consideration for the merger, they did not categorically deny the possibility of the same in the future,” according to the HSBC report.

The revamp proposal, which still 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.

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