Only a few firms demerge for genuine reasons, feel analysts

It seems this has been a season of demergers. Recently to join the bandwagon were Wipro and Pantaloon Retail. Most of the stocks listed after the demerger skyrocketed. However, market experts say while in some cases the companies manage to unlock value for the investor, in others it is more of a gimmick to distract the investor and confuse them about the final profit or loss from their shareholding in such companies.

Cinemax and Provogue are two such companies that have managed to unlock value for the investors through their recent demergers into Cinemax India and Cinemax Properties and Provogue India and Prozone Capital Shopping Centres respectively.

However, the demerger of Sundaram-Clayton into Sundaram Clayton and Sundaram Investment spelt a flat return for investors post-demerger, according to market experts.

According to a market analyst, “When a successful demerger goes through, good businesses start commanding better valuations as the market doesn’t want to see companies get into unrelated businesses. Instead, they favour companies splitting and going in for stand-alone companies.

“Only when such companies demerge they come into the investor limelight and get market participants interested in them leading to value unlocking. This has happened in the case of Cinemax India and Provogue India.” More recently, IT giant Wipro has decided to spin-off its non-IT business into a separate unit called Wipro Enterprises. The new unlisted entities will include Wipro Consumer Care & Lighting, Wipro Infrastructure Engineering and Medical Diagnostic Products & Services through a strategic joint venture with GE.

Similarly, the boards of Kishore Biyani’s Pantaloon Retail India Ltd and Future Venture India Ltd have decided to demerge fashion business in the two entities into a new entity called Future Fashion which would be listed. The exchange ratio is one equity shares of Future Fashion, for every three equity/DVR shares held in PRIL, and one equity shares of Future Fashion, for every 31 equity shares held in FVIL.

Given the dynamics involved in deals such as this, V. Krishnan, CEO, Integrated Enterprises, a financial solution provider for retail investors said: “Only few company’s go in for demergers for genuine reasons but on the whole we are not comfortable with them as the company’s use this as a tool to distract the investors from something that has gone wrong in the company and confuse them.

“They should ideally be explaining the reasons for the demerger and how it will impact the investor in a single sheet of paper without any jargon but they are not doing so.”

manisha.jha@thehindu.co.in

(This article was published on November 16, 2012)
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