Crompton Greaves to sell stake in consumer products division to Advent, Temasek

Purchase price lower than street expectations

The debt-ridden Avantha Group on Friday sold its 35 per cent stake in Crompton Greaves’ consumer products division to private equity firms Advent International and Temasek for Rs 2,000 crore. The funds will now make an open offer for the consumer durables arm, to be listed after its demerger from Crompton Greaves.

According to a company statement, Crompton Greaves Consumer Electricals Ltd will be demerged from Crompton Greaves into a standalone company and, consequently, listed on the National Stock Exchange and BSE. The transaction is expected to be completed in the first quarter of 2016, and Advent and Temasek will take over Rs 700 crore of Crompton Greaves’s debt.

Analysts said the deal was a disappointment for investors, as they had expected a far better valuation. “The deal values the consumer business at 19.8 times the FY16 estimate for the consumer business, 10-12 per cent lower than the Street estimate. While the initial deal amount seems on the lower side, more clarity on the demerger (the debt transferred, one-time royalty, etc) will help give a more accurate view on the valuation,” said an analyst with Prabhudas Lilladher.

LIFELINE DEAL FOR AVANTHA

• Avantha sells 35% in consumer durable arm of Crompton Greaves for Rs 2,000 cr
• Advent, Temasek to pay Rs 92 a share, make open offer
• Avantha to use proceeds to pay off KKR, Apollo loans
• Crompton Greaves may get one-time brand fee from consumer arm
• Analysts say valuation is low, need clarity on one-time brand fee

Reacting to the news, the Crompton Greaves stock fell 2.55 per cent to Rs 164 a share on Friday.

Another analyst said the money the consumer durables company paid for using the ‘Crompton Greaves’ brand would be crucial. “The consumer durables company will have to take some debt to make the one-time payment, as the consideration for the brand is likely to be Rs 1,000 crore. Earlier, Crompton had indicated it would not charge any recurring royalty for the brand after the demerger and would, instead, seek a one-time fee. Details on this are unavailable,” Renu Baid, an analyst with B&K Research, wrote in a note to clients.

A Jefferies analyst said the implied valuation of Rs 5,800 crore, at Rs 93 a share, was lower than the valuation of Rs 7,200 crore at Rs 115 a share. “Crompton has no near-term upside triggers, with the sale of the cash flow-generating business behind. Some uncertainty on the medium-term fate of the consumer business after sale to financial investors has come to the fore,” said Jefferies analyst Lavina Quadros.

Avantha will use the proceeds of the sale to retire its $250-million debt, owed to private equity companies KKR and Apollo. Earlier, Avantha Group had sold its Korba power plant to Adani Group for Rs 4,200 crore.

Last year, the Crompton Greaves board had cleared a proposal of the company retaining 26 per cent stake in the consumer durables business and the promoter, Avantha Group, getting 25.8 per cent.

But following opposition from minority investors and comments from BSE and the Securities and Exchange Board of India, on March 3 this year, the company said its board had reconsidered the demerger proposal and decided on a 100 per cent demerger of the consumer products business. This, it added, would be carried out in such a manner that the shareholding pattern of the consumer company mirrored that of Crompton Greaves. According to the new proposal, Avantha Group would hold 35 per cent stake in the company, while Crompton Greaves wouldn’t hold any.

“After extensive search and careful evaluation, Avantha is pleased to have signed a share purchase agreement for the sale of its stake in Crompton Greaves’ consumer business,” said Gautam Thapar, founder and chairman, Avantha Group. “Both Advent and Temasek have extensive financial sector and operational expertise and we believe they are well-positioned to support CGCEL (Crompton Greaves Consumer Electricals Ltd) in its next phase of growth.”