The Hindu Business Line : Demergers are the flavour; cos see more benefits

Demerger allows for splitting of businesses within a company or separating investments out of the core business. In most of the cases, demerged companies get listed or have already got listed.

Investment bankers said the trend has gained momentum as several of the businesses of companies have become bigger and their true value is not reflected in the stock price of these companies. Moreover, these companies want to focus on one business and help other businesses to raise their own capital and attract investors. Other reason for the demerger is the split among family members. Most of the experts said demerger creates more value for the shareholders in the long term than mergers.

"Companies which have more than one business and the smaller business is not recognised in valuations of these companies are going for demergers," said Mr T.V. Raghunath, Executive Director, Kotak Mahindra Investment Banking. He said with demerger, individual businesses could raise their own capital and bring partners into the business.

However, he said the changes in the Income-Tax Act in 1999, which made demergers as tax neutral, prompted companies to go for it. "Earlier, a lot of companies had entered into various business and now they (companies) want to focus on one business and this is leading them to hive off other businesses," said Mr Rashesh Shah, CEO and Managing Director of Edelweiss Capital.

Some of the companies that have announced or already gone through demergers are: Great Eastern Shipping, which is demerging its offshore business; Eveready Industries separated its tea business into McLeod Russell; Auto ancillary company Rane Madras transferred its investments into separate company and the investment company was also listed. The demerger list also includes Vardhman Spinning and Morarjee Realities.

Earlier this week, GTL said that it was demerging its IT infrastructure business to GTL Infrastructure. Reliance Industries investment would be separated from its core business and all the shares of the company would get the shares of several investment companies. Surya Lakshmi Mills had transferred part of its textile business to another company Rajvir Industries.

On the investment of companies being transferred to separate companies, Mr Raghunath said stock markets have been valuing only the main business, but do not value the investments of these companies. Mr Shah of Edelweiss Capital said demerger creates more value for the shareholders than mergers. "In mergers, there are various issues such as integration and operations efficiency while this is not there in demergers," he said.

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