In the recent past, India Inc has been moving into restructuring mode, where companies are either demerging their various divisions or doing away with the holding structure altogether. For instance, Adani Enterprises Ltd (AEL) recently announced that it’s doing away with the holding company structure of its stake in two listed companies – Adani Ports and Adani Power (as also unlisted companies). Every shareholder of Adani Enterprises expected to receive 14,123 shares in Adani Ports and 18,596 shares of Adani Power for every 10,000 shares held in Adani Enterprises. “The transaction is expected to unlock value for the shareholders of AEL by eliminating the holding company discount,” announced the management while declaring the demerger.
Earlier, Max India had also announced that it was splitting into three entities. It would be renamed Max Financial Services and involve the life insurance business. Shareholders were to get one additional equity share for every share held in the new business verticals, which focussed on health and allied business that comprise Max Healthcare, Max Bupa and Antara Senior Living. This new entity was to be known as Max India. The third vertical was to be known as Max Ventures & Industries, where shareholders would get one new share for every five shares held in Max Financial Services. This entity would be into manufacturing and specialty films. While announcing the rationale for this demerger, the management stated that this action would ‘unlock shareholder value’.
Crompton Greaves was another company that announced the demerger of its consumer durable business, where the shareholding of the new company would mirror the existing shareholding.
So, unlocking value for shareholders is a new theme Indi^ Inc is play; ing out. “At present, capital infusion is the name of the game, where new investors would have the mandate to invest in one particular business and not all the businesses the company possesses,” says Deven Choksey, a leading broker, explaining the reason behind this rush. “That is why promoters are de-coupling their various businesses to drive growth.”
These three are not exceptions. In the last few years, similar activity has been taking place sporadically, but not at the same pace. For example, Marico demerged its skin care and spa business into a separate listed entity, Marico Kaya, with the shareholders of the parent company getting shares of Marico Kaya, much to their advantage. Wipro also demerged its FMCG and consumer durables business from its iT/ITeS activities to stay more focussed in all business verticals. But as an exception, took the FMCG business private, controlled by the Premji family.
Changing market dynamics
In an era when business is competitive and challenging, it makes sense for each company to be more focussed and sharp, so that one is able to respond to the changes in market dynamics in the quickest possible time. It was the same logic that Dilip Shanghvi of Sun Pharma applied when his company demerged its r&d business into a separate company, Sun Pharma Advanced. The Bajaj group also split Bajaj Auto into two new companies: Bajaj Finserv and Bajaj Holdings & Investments, with shareholders of the parent getting stakes in both new entities, which helped unlock value for them.
Now, it may be time for Bajaj Finserv in turn to undergo another vertical split a la Max India, with its life insurance business, non-life insurance business and NBFC business deserving separate attention. On the other hand, Bajaj Holdings, which holds a 31.49 per cent stake in Bajaj Auto and 39.16 per cent in Bajaj Finserv, is now commanding a market cap of just ?15,000 crore, while these investments’ market value itself is close to ?30,000 crore.
Similarly, Sundaram Clayton controls TVS Motors, another leading two-wheeler player. It holds a 57.40 per cent stake in TVS Motors, giving its investment a market value of ?8,000 crore, while Sundaram Clayton’s own market cap is only ?3,700 crore. Sundaram Clayton is an active player in the auto components business and has a turnover in excess of ?1,000 crore, which clearly shows that Sundaram Clayton’s shareholders are not reaping as much benefit as they should, because of the holding company discount.
Other companies that have demerged in the recent past include Orient Paper, which separated its cement business from the paper and consumer durables business, giving its shareholders new shares in Orient Cement. Kesoram, another Birla group company, which is into various unrelated businesses like tyres, cement and rayon, was also in the news when it mooted the sale of its tyre business to reduce its debt. But for the time being, the company’s board has decided to transfer its tyre business in Haridwar to a separate subsidiary and may monetise the same at a future date.
Empirical studies suggest that a holding company structure invariably fails to unlock value for shareholders. Investors don’t attribute fair value to the holding company, despite it holding substantial stakes in good quality companies. Theoretically, the holding companies’ investments should be valued at a 30 per cent discount but, in real life, discounts go as high as 70 per cent, which defies logic. By not doing away with the holding structure, it is doing an injustice to the shareholders (read minority shareholders) of the holding company, who are not able to revise the intrinsic value of their investments.
“Investor appetite for holding companies is less, because minority shareholders have little say in the allocation of funds of the holding company,” explains Choksey. “Due to this, the holding company’s investments in a subsidiary company are valued at 20-30 per cent discount to market value. But, in a bull market, this discount tends to come down. Also, many a time, the fact that a company is holding valuable assets is not understood by investors, which could also be a reason it is not getting the right valuation in the stock market.” Moreover, the investments are reflected at book or acquisition value in the holding company and are not marked to market.
One case in point is Bombay Burmah, the holding company for the Bombay Dyeing group. It holds more than a 50 per cent stake in Britannia Industries through its various step-down subsidiaries. The present market value of Bombay Burmah’s stake in Britannia is more than ?12,000 crore but Bombay Burmah’s own market cap is a mere ?3,300 crore, which does not reflect its true investment value. In fact, Bombay Burmah also owns quite a few other assets, including a 14 per cent stake in Bombay Dyeing.
Of course, the holding company’s stake in Britannia Industries is through various step-down subsidiaries, the major one among them being Associated Biscuits, which
holds a 44.95 per cent stake in Britannia. Associated Biscuits, in turn, is a 100 per cent subsidiary of Leila Lands, which itself is a 100 per cent subsidiary of Leila Senderian Berhad, a 100 per cent subsidiary of Bombay Burmah. Due to this structural maze, there is little awareness among the investors that Bombay Burmah is the holding company of Britannia. There may have been historical reasons for Bombay Burmah to hold the stake in this fashion, because it is these companies that had the case to make the acquisition but that does not justify the fact that the investors of Bombay Burmah are not able to reap
the real benefits coming from its stake in Britannia.
Discounts of the holding company, often well above 20-30 per cent are common. For example, Grasim Industries, the flagship company of the Aditya Birla group, owns a 60.25 per cent stake in UltraTech Cement, the investment market value of which is ?50,000 crore. But Grasim’s own market cap is only ?35,000 crore. Also, Grasim has other businesses which are valuable, in particular its viscose business in which it is the dominant player, and stakes in other companies such as Idea Cellular, in which it holds a 4.76 per cent stake.
If Grasim does away with the holding structure, the company’s shareholders would reap rich dividends, because they would get the shares of UltraTech too. Aditya Birla Nuvo, another Aditya Birla group company, also functions as a holding company for many of its businesses, such as finance, insurance and broking, as well as retail (Madura Garments), including brands like Van Heusen and Louis Philippe. It also holds a 23 per cent stake in Idea. If Aditya Birla Nuvo decides to demerge the businesses into various verticals and give shares of each business vertical to its shareholders, it can unlock huge value for them, as each of the businesses has become quite valuable on its own.
In developed countries, there are instances where minority shareholders have forced companies to either split the business or sell it. “The shareholding pattern of companies in India gives little headroom to investors to force moves like restructuring. The controlling shareholder will eventually take this call. This is in contrast to the west, where investors have successfully fought for the break-up of companies like Motorola, eBay and Yahoo,” says Amit Tandon of proxy advisory firm, Institutional Investor Advisory Services. But many times there are genuine reasons for companies to keep various businesses in one company initially with later plans to demerge the same. As time passes even promoters forget about the splits or demerger of the business as they don’t wishes to disturb the
existing structure. “You can make an argument for a new business to be housed as a division within an exist- | ing company – it can be more cost effi- 5 cient through sharing resources and manpower. However at some time ‘value’ must be realised – unless there are strong forward and backward linkages. This can happen, through sale of (part or the entire) business, or through a restructuring by listing the two businesses – as we have seen in Max and the revised structures in Crompton Greaves,” adds Tandon.
There are instances where a company has taken the reverse route too. One such case is the Vedanta group, which made Sesa Sterlite its holding company for the various group companies. But the shareholders were not happy with this kind of structure and, hence, the company has not been able to outperform the broader market. Similarly, ITC too has many businesses housed within one company and there seems little possibility of these businesses getting demerged into various verticals.
However, ITC may like to hold on to this structure for the foreseeable future, as it helps it shed the image of a tobacco-stained company. Investors don’t mind the holding company structure, as long as the company is able to generate wealth for its shareholders, which has been case with ITC. Problems arise when the company underperforms the broader market, doing an injustice to minority shareholders.
Similarly, institutions like HDFC, where there are no identifiable promoters, may continue to hold on to this structure, as it allows various verticals to use HDFC brand equity in their businesses. What is in HDFC’s favour is the fact that despite its holding company structure, the company has been able to generate wealth for its shareholders, which makes them happy with the way the company is performing. Hence, despite the holding company structure, HDFC does not suffer from any substantial holding company discounts.
In the case of corporate giant Reliance Industries, its various new businesses like retail and telecom have little synergy with its petrochemical and refining business. But retail is in a growth phase and the telecom business is about to be rolled out. The holding company structure works only as long as new businesses need initial funding and support. Once they gather critical mass, they should be demerged and allowed to grow at a rapid pace, which would benefit shareholders and also improve the image of the promoters. There is a probability that Reliance may offer shares of retail and telecom to its shareholders to unlock value from them, ril had done this in the past too, when it gave shares of its telecom, financial and power generation & distribution businesses to its shareholders in 2005-06.
Going forward, many companies are likely to take the demerger route to unlock value for the shareholders. This may be more a compulsion than a choice for many promoters, as the pressure to perform and win investor confidence would be the name of the game. Such activities gather pace in a rapidly rising market as markets would push and incentivise promoters to be more investor-friendly. There is reason to believe that companies like Grasim, Aditya Birla Nuvo and Sundaram Clayton will move away from their holding structure to create wealth for their shareholders. This would be good news for minority shareholders.
♦ SUNIL DAMANIA [email protected]