The Hindu Business Line : Clariant group: Positive reaction in the merger

SHAREHOLDERS of Clariant, Colour-Chem and Vanavil Dyes may consider retaining their holdings, as there could be scope for further gains when the merger process is completed. Following the announcement of a merger of the five entities in the Clariant group, the Vanavil Dyes' stock gained 28 per cent in the past week; Colour-Chem and Clariant have put on 13 per cent and 11 per cent gains respectively on the back of higher trading volumes.

These gains are likely to be retained, as the combined entity would command a better valuation.

The merger would augur well for the Clariant group in India as it would lead to a consolidation of businesses, reduce overhead costs and lead to higher profitability. A wider product profile would also lower the business risk.

Clariant (Switzerland), which controls Clariant (India), Colour-Chem and Vanavil Dyes through a complex web of entities, has set in motion the merger of its subsidiaries (including two closely-held outfits) in India. Clariant International — a 100 per cent subsidiary of Clariant (Switzerland) — holds a 50.94 per cent stake in Clariant India. The merger has been in the works for long. The merger plan comes after the completion of the open offers to shareholders of Colour-Chem and Vanavil Dyes.

The entities may be merged into Colour-Chem as the parent holds a higher stake in it; it also has a larger shareholder fund base and owns a stake in Vanavil Dyes, which could be cancelled out to lower the equity of the combined entity. Colour-Chem also holds a 100 per cent stake in a lesser-known company, Kundalika Investments, which is also set to be a part of the merger exercise.

Kundalika does not make a significant contribution by way of revenues or earnings. The fifth company that is to be a part of the merger is BTP India Private Ltd, a closely held company.

Manufactured dyestuffs and intermediates for dyes and pesticides are the major sources of revenue for the three listed entities. Vanavil Dyes derives about 15 per cent of its revenues from napthols, which are used to manufacture pigments and dyes for textiles.

Colour-Chem manufactures synthetic resins and binder materials, which form part of its speciality chemicals division.

The speciality chemicals division has been a consistent performer; its return on capital employed was 38 per cent for FY-05. Leather chemicals contribute about 50 per cent of Clariant's revenues.

Clariant also manufactures master batches, which are used in the plastics and nylon industry. The merger of the entities would further diversify the risks for shareholders of these companies across segments and industries.

Manufactured dyestuffs and intermediates would continue to dominate the revenues of the merged entity; they would contribute about 55 per cent. Leather Finishing agents would contribute about 20 per cent, while synthetic resins and binder materials would contribute 12 per cent. The balance would come from napthols.

The merged entity would be operating on a larger scale with revenues of about Rs 800 crore. With a larger number of products in its basket the merged entity would be able to better serve the needs of its customers. The company would also derive benefits from an enhancement in the scale of operations.

The stocks of the three companies trade within a band of 15 to 20 times of trailing twelve-month earnings. Clariant has been a consistent performer maintaining a 20 per cent return on net worth in the past decade.

Colour-Chem's return on net worth, however, has been unsteady fluctuating within a band of 7 per cent and 23 per cent.

Vanavil Dyes has a low return on net worth of 6 per cent. As the promoters hold more than 50 per cent stake in each of these entities directly or indirectly, a swap ratio favourable to shareholders is likely.

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