The Hindu Business Line : A de-merger that won’t benefit small shareholders

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A de-merger that won’t benefit small shareholders

As a small shareholder in Macmillan India, I have a few points to make about the company’s recent de-merger scheme, which I feel is unfair to minority shareholders.

Background

Macmillan India currently has two main businesses — publishing of books and information processing (IT/BPO). It has many subsidiaries too. The company now plans to merge its BPO subsidiaries — Macmillan ICC Publishing Solutions and Charon Tec Ltd into Macmillan India. This will consolidate all its BPO business into a single legal entity.

As a next step, it plans to de-merge the book publishing business out of Macmillan India into an unlisted company called Macmillan Publishers India Ltd (MPIL).

Existing shareholders in Macmillan India will receive new shares in the ratio of 1: 1 in MPIL. But these shares will not be listed on the stock exchanges. Shareholders who do not wish to remain invested in the unlisted entity, can sell the shares to the promoters at Rs 69 a share.

As a result, for the de-merged book publishing business, investors are offered a maximum of Rs 69 per share.

I believe this scheme is detrimental to minority shareholders in Macmillan India. First of all, it is not fair to the minority shareholders that shares in an unlisted entity are being issued. Even if shares for the de-merged entity were issued, it would be better to list them on the stock exchanges and then go in for the delisting process, as prescribed by SEBI.

Unfair valuation

In my view, the valuation of Rs 69 per share of de-merged publishing business is not fair on the following counts:

This business is more than 100 years old and Macmillan commands a strong brand premium in English medium schools. That the business has good distribution strengths along with strong relationship with schools has not been considered.

It represents only the book value of business, while the actual valuation would be at a substantial premium if it sells out to a third party.

The book publishing business has significant growth potential in India, with significant growth in the English medium schools and government focus on education.

The market value of some of the physical assets, such as the office at Nariman Point and the manufacturing facility at Chennai, may be significantly higher than what is captured in the books.

The acquisition of Frank Bros, a similar business, was at Rs 45 crore for a company with revenues of Rs 36 crore and net profit of Rs 1-2 crore. The consolidated sales of Macmillan’s de-merged publishing business is estimated at around Rs 100 crore, with net profit at Rs 7-8 crore.

The sale of the de-merged publishing business to a third party may fetch a much higher value than what is being proposed in the de-merger scheme. This could be beneficial to both the promoters and the minority shareholders.

MANOJ BAGADIA

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