Sundaram Clayton Demerger - Not so Sundar?

Sundaram Clayton is going through a demerger. The scheme, which can be found here recently received shareholder approval.

Now all of us have certain impression about various promoter groups; about their ability, about their integrity, about the way they treat the minority. So if I say Essar Group, you will probably say bhaago! You wont say that if I mention the TVS Group (corrected), right? They have been generally known for their integrity. However, the current demerger in Sundaram Clayton (promoter holding 80%) may change one's impression/opinion about the Group. Lets take a look at what is happening here..

The Demerger

The entire scheme of amalgamation & demerger is as follows:

1) Anusha Investments Ltd (AIL), a wholly owned subsidiary of Sundaram Clayton Ltd (SCL) will be amalgamated with SCL. (So, no dilution, no change in shareholding)
2) The 'non-automotive business' of SCL will be demerged and put into Sundaram Investments Ltd (SIL), which is currently a wholly owned subsidiary of SCL.
3) SCL's entire existing equity capital will be cancelled. For every 2 shares you hold in SCL, you will get 1 equity share of SCL and 1 equity share of SIL or 1 redeemable preference share of SIL, depending upon what the shareholder chooses. (Everything of same face value). In effect, the number of equity shares of SCL will become half. % shareholding of all parties will remain same in both companies.
4) The resulting company, SIL, will not be listed. Instead, an exit option will be provided to both the equity as well as preference shareholders of SIL. Equity as well as preference shareholders will be given an exit at Rs.48 per share of SIL. Exit will be given by Sundaram Engineering Products Services Ltd (SEPSL), another group company.

There are some weird things here, sure. But there are a couple of things which I found disturbing. Lets see what these issues are..

Issue 1: Delisting without Reverse Book Building

Shareholders of SIL (the resulting company) will be given an exit option. Now, they will have to take this option, since the shares are not going to be listed. So effectively, the result will be that there will be no non-promoter shareholders in SIL. There are 2 points which one might find objectionable here..
1) The entire non-automotive business is effectively getting delisted, without any reverse book building process. (Since this is being done through an approved scheme).
2) This will happen at a pre-decided price of Rs.48 per share. Now, the question is, whether this is a fair price? This is based on an independent valuation report, which has not been shared with the shareholders. But the point is that the minority shareholders have no say in the matter, which is against the basic funda of delisting.
Now the other side of the coin.. One can say that, anyway, holding companies such as what SIL will become, do not get proper discounting and valuation in the market. They quote at very very low valuations, as low as 5-10% of the value of their holdings. So, by giving an exit at a price which is at least higher than this, the management is actually doing minority shareholders a favour! Depends on what point of view you have!

Issue 2: Who pays for the exit (delisting)

When a company is delisted, the promoters pay the minority shareholders to acquire their share and have full control over the company. Logically, in case of the resulting company SIL, when the exit is being provided to the minority investors (who will hold 20%), it is the promoters who should be paying for this exit out of their own pockets. However, in this case, SEPSL will be paying the minority for the exit. Lets see who owns SEPSL.

Click to enlarge

So in effect,
1) SEPSL is indirectly held fully by SCL. So at the group level, its SCL who is paying the minority for their exit from SIL. Sooo after the exit, 80% of SIL will be held by the promoters, while 20% will be held indirectly by SCL, in which promoters hold 80% anyways.
2) So effectively, promoters are getting 100% control of the non-automotive business of SCL, without paying a single rupee from their own pocket. Illegal? nope.. Ethical? I wont say so!

To conclude.. although in this post, I have not discussed whether there is a money making opportunity in SCL currently (i will keep that to myself!!), what disturbed me is that a group like TVS (corrected) is doing something questionable, in a totally opaque sort of way. Not a very good sign at all. Just goes to prove that due diligence is a must, irrespective of the overall reputation and impression of the management in question. (A little part of me honestly hopes and wishes that i am wrong about this..such things are not expected from the TVS Group (corrected))

Cheers and happy investing!!


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