Landmark restructuring

Business India 26 September 2005

The three-way merger of group companies Indian Rayon, Birla Global Finance and Indo Gulf Fertilisers will make the new entity a strong conglomerate

After a gap of three years, Kumar Mangalam Birla, chairman of the Mumbai-based Aditya Birla group, has again restructured his group companies. This time around, Birla has merged group companies Indo Gulf and Birla Global Finance with Indian Rayon. The merged entity will be r;enamed Aditya Birla Nuvo. According to the group, the landmark restructuring, valued at over Rs 5,000 crore, is one of the major consolidations of its kind in the country. "The restructuring is a major step in shareholder value creation. It c;reates a company that captures opportunities in the evolving Indian economy through focussed value businesses, such as Carbon black, VFY, textiles and fertilisers, and driving high growth businesses namely garments, IT/lTES, financial services and telecom," says Birla.

The restructuring will take place under two separate schemes. Under one scheme, Indian Rayon will issue one equity share of Indian Rayon to Indo Gulf shareholders for every three equity shares of Indo Gulf they hold. Under the second scheme, Indian Rayon will also issue to Birla Global finance shareholders one equity share of Indian Rayon for every three equity shares of Birla Global Finance. The swap ratio is expected to translate into a reasonable premium to both Indo Gulf and Birla Global Finance shareholders, based on the current Indian Rayon share price. The share exchange ratios were based on calculations done by two firms — Bansi S. Mehta & Co and Deloitte Haskins & Sells.

The merger is effective 1 September 2005. Besides the approvals of shareholders of the three companies, the merger will also need the consent of the high courts of Bombay, Uttar Pradesh and Gujarat. The new shareholding pattern will see the promoter's shareholding at 38 per cent, financial institutions at 15 per cent and banks at 22 per cent. The remaining 25 per cent will be with the public. Prior to the re-organisation, the promoters held 28.6 per cent in Indian Rayon, 58 per cent in Indo Gulf and 75 per cent in Birla Global.

The idea is to make Indian Rayon, or Aditya Birla Nuvo, a diversified, high-growth company. The combined entity will have nine businesses — textiles, insulators, carbon black and VFY from the brick and mortar segment and life insurance, telecom, mutual funds, garments and IT from the new age businesses. Investments in new age businesses have been increasing. For FY 2005, the group has invested Rs 764 crore in new age businesses. However, according to Sanjeev Aga, managing director of Indian Rayon, the need for fresh investments is now coming down.

The new company will have a stronger balance sheet. For FY 2005, the combined entity has sales of Rs 3, 209 crore. Of this, insurance contributed 30 per cent, garments 15 per cent, carbon black 15 per cent, textiles 14 per cent, VFY 11 per cent, IT/ITES 6 per cent, insulators 6 per cent and telecom 3 per cent. Post-restructuring, for financial year 2005-06, Indian Rayon hopes to report a turnover of Rs 6,000 crore. Aga will be the managing director of Aditya Birla Nuvo, while S.K. Mitra, Rakesh Jain, K.K. Maheshwari and Adesh Gupta will be the new faces on the company's board. Post amalgamation, Jain will continue to lead the group's carbon black business globally and report to Birla. The financial services business which was led by Mitra, who will continue in the same fashion and report to Birla as well. The Indo Gulf fertiliser plant at Jagdishpur, UP will report to Aga.

Though the spelling of Nuvo has been fabricated, it captures the spirit of the new company. Some of the businesses of Birla Global Finance (such as hire purchase) have already been hived off. The rationale behind merging Birla Global into Indian Rayon is to bring all the financial service businesses under a single entity. Birla Global, the original flagship of the financial services arm of the AVB group, is registered as a non banking finance company. It is involved in capital, corporate finance and general insurance advisory. The acquisition of Alliance's mutual fund business has increased the company's assets to Rs 16,000 crore.

Birla Global has two joint ventures in the financial businesses sector — Birla Sun Life Insurance and in the mutual funds business. With a premium income of Rs 596 crore for FY 2005, Birla Sun Life Insurance is the second largest private life insurance company in the country. Birla Sun Life has contributed more new business than the JV partner, Sun Life's own Canadian operation. In fact, BSL is the largest new business generator for Sun Life in Asia. The group's stake in Birla Sun Life Insurance is already being held by Indian Rayon (Aditya Birla Nuvo). While integrating the financial services business into Nuvo, it will allow BGF to look at new opportunities. At present, the main areas of business for BGF are asset management and life insurance.

The second JV with Sun Life is in the mutual funds business. Here, Birla Sun Life is the sixth largest mutual fund in the country. At end-July, the company was managing assets of over Rs 10,000 crore. Birla Sun Life Distribution, a third JV with the Canadian company, sells products of third party companies such as mutual funds, bonds and fixed deposits. Plans are to enter the pension business as and when it opens.

Indo Gulf has a strong brand name in its Shaktiman branded urea. Functioning in an over-regulated industry structure and a controlled pricing regime, Indo Gulf couldn't achieve fast growth. With the de-merger of the copper business from Indo Gulf in 2001, the idea was to make Indo Gulf into a fertiliser major. With no changes in the fertiliser sector on the horizon, the merger with Indian Rayon is expected to help the Indo Gulf shareholder to migrate to a high growth business.

"Even though the fertiliser business has seen steady profits, regulatory uncertainties constrain growth avenues, making accelerated value creation difficult. Becoming a part of the Indian Rayon shareholder fraternity should provide Indo Gulf shareholders a broader canvas to participate in enhanced value creation. For Birla Global shareholders, they extend their participation in financial services beyond mutual funds into life insurance as the financial services business of the group gets consolidated under Indian Rayon. This transaction will strengthen the financials of Indian Rayon, open new opportunities and should result in enhanced investor interest. The company has a demonstrable record of managing a diverse portfolio with razor sharp focus in each business," says Birla.

According to analysts, the merger will help the new entity use Indo Gulf's strong cash reserves for future growth plans. Idea Cellular will also be a part of Indian Rayon. "It has a strong brand name, a strong market share and is a big value creator," says Aga. After much speculation that the group was opting out of the telecom business, the group has now decided to stay on in this booming sector. The group recently increased its stake in Idea Cellular to 50 per cent after buying a part of the Cingular (previously AT&T) stake at Rs17.5 per share. The merger will consolidate the group's holding in Idea under one entity. In fact Indo Gulf was the original investor in the company in the 1990s with a 30 per cent stake.

For FY2005, Idea Cellular reported a turnover of Rs 2,400 crore and a net profit of Rs 76 crore. After acquiring Escotel's business in 2004, the company has a subscriber base of over 6 million.