• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

S. Vaidya Nathan

MERGERS, demergers, asset sell-offs, exiting unviable businesses, fine-tuning debt burden to ensure lower interest costs, voluntary separation schemes and focusing on improving operational efficiencies — Corporate India has done it all as it took onthe challenges of competition, both domestic and global, and the pressures on the pricing front imposed by excess capacity and the shift towards lower spreads in the services business.

To get a sharper focus it restructured like never before. Companies such as Hindustan Lever, Grasim, Larsen and Toubro, Tata Steel and Tata Motors, to name a few, have shed the non-core businesses. Acquisitions have been used as a faster way to grow; Nicholas Piramal, which has picked up a slew of Indian and foreign pharmaceutical outfits, best exemplifies this.

Healthy wealth distribution

When Hindustan Ciba Geigy embarked on a demerger that created Novartis, Syngenta, and Ciba Specialty, ownership claims were, for the first time, distributed to shareholders in the proportion of their holdings.

This approach delivered value for shareholders in an even-handed manner; encouragingly, quite a few companies have followed this wealth-accretive model.

Shedding unviable business

Indian companies have always fought shy of getting rid of businesses that bled the balance-sheet without scope of turnaround.

When Indian Rayon's seawater magnesia plant failed to take off due to the threat from cheap Chinese imports, the company found no takers.

Three years ago, it decided to sell the plant in bits and pieces, and took a charge in excess of Rs 300 crore. Indian Rayon has managed to move on, and, happily, the valuation of its stock has also risen sharply.

Smartest takeover deal

It has to be Grasim's acquisition of Larsen and Toubro's cement businessat a price tag of about Rs 2,200 crore. By selling its stake in the engineering business to an employees' trust of L&T, Grasim cut its costs by Rs 450 crore. The effective price is a steal for a capacity of 19 million tonnes, a well-established brand name and a wide geographic footprint.

This deal has made Grasim numero uno in cement; it has also ensured that MNCs would take a long time to even match it.

Big-ticket merger

That Reliance Petroleum would be merged with Reliance Industries was clear from the time the former made its IPO. The top management kept ruling out the prospect, but there was a caveat: Dhirubhai Ambani only stated that a merger was unlikely till 2000-01.

The inevitable happened, but the market cap of the combined entity settled well below those of the two companies reckoned separately. It is only the bull market of 2003 that lifted the market cap to a level higher than that commanded by the two independently.

Debt management

Corporate India has benefited immensely from the reduction in interest rates. Companies have also aggressively recast their debt to reap incremental benefits.

A prime case in point is Gujarat Ambuja Cements. When it picked up DLF Cements (now Ambuja Cement Rajasthan) and ACC, it took a debt burden of over Rs 1,500 crore.

Deftly, the stake in ACC and Ambuja Cement Eastern was vested in Ambuja Cement Holdings, which then raised about Rs 800 crore by placing equity with strategic financial investors.

This was followed by replacement of high-cost debt with funds sourced at finer rates, a Euro convertible bond offering — a sizeable part of which has now been converted into equity — and overseas borrowings of $160 million last year to take advantage of the historic low in global interest rates. As a result, Gujarat Ambuja is now well placed to pursue acquisitions sooner than it appeared likely when it picked up the stake in ACC.

Cost control

Pushed to the brink by a protracted slump in commercial vehicles and teething problems with its Indica before the revamped version rescued its foray into the car market, Tata Motors embarked on a rigorous cost-control programme and managed to save Rs 400 crore on an annual basis. In varying degrees, other companies, too, have been in the cost-control mode.

Acquisitions gone awry

India Cements made the first moves in cement consolidation by picking up Raasi Cements, Visakha Cement and a unit of the Cement Corporation of India. It joined ACC at the top table in terms of capacities.

But, in the process, its debt ballooned to about Rs 1,800 crore. It had limited success in replacing debt with equity. Its fundamentals did not allow it to replace high-cost debt.

As the interest burden and repayment of principal appeared set to sink the company, it sold a couple of its units; in the process, the plan of pursuing growth through acquisitions was unravelled. It still has a mountain of debt; only a debt restructuring by lenders has offered a lifeline.

Message: If you do have the ability to raise equity, that is an unparalleled strength. Look no further than Grasim for a model; it has never had to seek recourse to this route, though it had the luxury to do so. This has helped it grow rapidly with just internal accruals and debt.

Shareholder-inimical exercise

Shareholder wealth maximisation is still not a priority for most companies. Precedence goes to taking assets private, which were created through public funds. Sterlite is a sterling example.

A conventional buyback, followed by a buyback under the opaque provisions of company law, the shareholder-unfriendly manner in which it was put through leaving them with unattractive non-convertible debentures, a threat of delisting in Indian markets so as to list abroad, and an opaque scheme of arrangement completes a harrowing period for its shareholders.

Takeover battle royale

When Sterlite made an open offer at Rs 115 per share for Indian Alumimium, it was set to walk away with the prize as its offer was at a substantial premium to the market price. But Alcan of Canada, queered the pitch with a higher-priced offer. Sterlite countered by raising its price to Rs 221, payable partly in debentures.

But on the last day possible under the takeover regulations, Alcan went for the jugular by offering Rs 200 in cash and raised its stake to about 53 per cent; a few years later, it sold it to Hindalco, making a tidy profit.

The only problem was that most shareholders, barring institutions, were unable to benefit from the upward price revision as it came on the last day. SEBI has subsequently altered the takeover time-line to ensure that revision of prices is completed seven days before the open offer period ends.

Valuable hostile bid

The bid by the Renaissance group unlocked value not only for shareholders of GESCO Corp, but also its parent, Great Eastern Shipping Company. Corporate India could do with more such instances, but the takeover regulation is tilted in favour of incumbent owners.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Fixed-income investing — Fading glitter of debt

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line