Wednesday, June 20, 2012

Sundaram Clayton Demerger - Some Clarifications

I had written about the amalgamation-demerger scheme between Sundaram Clayton (SCL), Anusha Investments (AIL), TVS Investments (TVSIL) and Sundaram Investments (SIL) a few days ago. I had highlighted a questionable corporate governance action in that post.
I got a number of emails, asking queries about the demerger. Seems like there is a bit of confusion about how the scheme has been interpreted/understood by people. So, here are some clarifications about the same.

What is the entire scheme?

Click to enlarge

What will happen due to the scheme?

  1. AIL (along with the TVS Motor stake) will get amalgamated with SCL and will stay in SCL itself. Nothing related to AIL is getting demerged. Since its a wholly owned company anyway, this has no effect on the financials.
  2. Existing shares of SCL will get cancelled. For every 2 of existing SCL shares, you will get 1 share of SCL and 1 share of SIL (all FV remain same)
  3. As a result, the number of shares in SCL's share capital will become half, from 3.8 cr shares, to 1.9 cr shares, FV Rs.5.
  4. The shares of SIL will not be listed. Instead, an exit option at Rs.48 per share is being provided (as detailed in previous post)
  5. Shares of SCL will be listed.
  6. % shareholding of everybody remains the same.

Is Rs.48 per share a fair exit for SIL shareholders?

In my opinion, it is a fair and generous exit being given to SIL shareholders. SIL will be essentially an investment company, with some investments which are not doing well (like TVS Electronics) and which will have very low dividend paying ability. SIL will have capital of 1.95 cr equity shares of Rs.5 each. At Rs.48, thats a valuation (market cap) of Rs.94 cr which is being provided to the shareholders of SIL.
If SIL were to be listed, looking at its financial position, I do not think that it will receive the same stock price (Rs.48) or market cap (Rs.94 cr). Shares of such holding companies remain listed at huge discounts. Hence, its my personal opinion that the shareholders of SIL are being given a more than fair deal.

Then whats my problem with the scheme?

The problem I had and which i mentioned in the previous post is about who is paying this money for exit, to SIL minority shareholders. Its not the promoters. Its a (indirectly) wholly controlled subsidiary of SCL itself, which is paying. So nothing goes out of the promoters pockets for gaining virtual 100% control of SIL. To be fair, the amount involved is relatively smaller, about 19 cr (20% of SIL).

Other points

  1. Since there is share capital restructuring happening in SCL, in my view, SCL will get delisted for a few days.
  2. When SCL relists again, its number of shares will be half of those at present. So, its EPS will become double. Hence, the price should also become double. I think SCL should be in the 275-325 range once it lists, if its at CMP till ex-date. (Please dont be happy..even though the price might double, your number of shares will become half..hence there will be no impact on the total value).
  3. The option being given to SIL shareholders is to either take an equity share or take a redeemable preference share of SIL. In my view, it makes most sense to opt for the equity share instead of the debenture, in case you are a shareholder of the SCL on record date. (I am not a shareholder of the company as on date, I have yet to complete my research on this special situation fully. I may or may not buy the shares in future).
I hope this post gives a bit more clarity on the scheme. In my earlier post, i had given greater emphasis on the corporate governance angle, rather than the scheme structure. Please do raise queries you might have or point out any errors you think I might have made. I will try my level best to resolve them.

Cheers and happy investing...

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JK said...

Since you have to sell back both to promoters at 48/- what makes you say equity is better than preference shares?

Neeraj Marathe said...

Mr JK,
Time involved is different. Pref shares will not be redeemed immediately, unlike equity shares. Go thru the scheme for details. I dont know bout u, but i will like to recv money immediately. You may, of course, like to go for pref shares, in which case, you should.

Kiran said...


Just to add to JK's question - The preference share will be redeemed at 15 months from the date of allotment. And you'll get back Rs. 52.5/- (a premium of Rs. 47.5/- on a Rs.5/- share) either in cash or in shares of SIL (most probably in cash). That is, they will pay you approx. 9% interest vis-a-vis Rs.48/- per equity share, which will come in immediately.

Tax considerations aside, the choice remains that if your opportunity cost is greater than 9%, you should opt for equity share, else the preferred would be ok too.

Neeraj - can you elaborate a little on the tax treatment of this whole thing - say, how will Rs.48/- be taxed, can/should the re-listing be treated as gain/loss etc?

Neeraj Marathe said...

Hello Kiran,
As for opportunity cost, etc, someone like HDFC Ltd is offering 10% for their FDs. I would not be very comfy holding unlisted pref shares of a relatively unknown company..thats just my choice..
The company will intimate in due course what cost of acquisition is be considered for the resulting company. Tax calculations will be based accordingly..

Anonymous said...

Hi Neeraj

How do you copy chart from an excel sheet into your blogspot?

And once you copy from snipping tool an image, etc, how do you paste it into your blogspot?

Thanks for help.

Neeraj Marathe said...

Hi Anon,
Yaar copying tables n all is a very tedious procedure coz blogspot does not have the facility to put up tables/excel sheets. So what i do is take a 'print screen' of the excel sheet, copy it in Paint, select the relevant portion i want and save it as a picture file. I then upload the pic!
i do not know if there is any other better way..i am very much technologically backward!

Anonymous said...

thanks yaar neeraj