Crompton Greaves, the electrical consumer durables player, has amalgamated with itself Butterfly Gandhimathi Appliances, a manufacturer of cookers and other kitchen appliances, in a share swap arrangement. Crompton Greaves will offer 22 shares of the company for every 5 shares of Butterfly. It must be noted that the target company is the consolidated subsidiary of Crompton Greaves after last year’s share purchase. Crompton Greaves already holds 75 per cent stake in Butterfly. While combining forces can result in synergies, a large part of the value should have been captured post last year’s deal. Lower compliance burden as Butterfly exits in the secondary market is the main incremental positive in the first take.

Based on March 25 closing price, when the swap ratio was announced, Butterfly/Crompton Greaves were trading at ₹1266.2/₹292.4, which implied a 1.6 per cent premium to Butterfly shareholders. Based on this, Butterfly is valued at a trailing PE of 75 times trailing earnings.

However, the shares of Butterfly were trading 3.7 per cent lower and Crompton Greaves was trading 1.2 per cent higher at Monday closing, which potentially increases the premium to 6.7 per cent for Butterfly shareholders. But the final premium should be looked at the record date, which is yet unannounced.

Also read: Crompton and Butterfly announce merger

Limited overlap

Cromton Greaves points to unlocking the full potential of the combined business. On a product basis, there is not much overlap, which is a positive; Crompton leads in fans, lighting, residential pumps, and water heaters and air coolers. Butterfly, on the other hand, operates with a focus on mixer-grinders (which can be the leading overlap), gas stoves, pressure cookers and others. Geographically, while Crompton has a pan-India presence, Butterfly’s brand recall may be stronger in South India. As mentioned, the scope for synergies includes distribution, geographical presence, manufacturing supply chain, overheads, but most should have been captured in last year’s announcement. A lower compliance burden should be the largest cost-saving from the current transaction.

In February 2022, Crompton Greaves acquired 55 per cent in Butterfly at ₹1,403 per share and later announced an open offer following the purchase of controlling stake. The company later offered 6 per cent of the Butterfly stake for sale at ₹1,370 per share, to bring its shareholding to the prescribed 75 per cent limit. The current share-swap will lead to a further dilution of 3 per cent, which will be held by the current public shareholders of Butterfly.

Butterfly reported a revenue and operating margin of ₹248 crore and 9 per cent, compared to Crompton’s standalone revenue and operating margin of ₹1,266 and 10 per cent in Q3FY23.