Grasim-ABNL merger prospects brighten

After Voda merger, Idea promoters can concentrate on other verticals, a positive for ABNL or Grasim

With Vodafone confirming discussing with the Aditya Birla Group over a potential merger with Idea Cellular, the prospects also brighten for a merger of Aditya Birla Nuvo (ABNL) with Grasim.

With the news, as telecom stocks led by Idea Cellular surged, the stock price of Grasim and ABNL also gained on Monday, by 4-5%.

Among the major concerns being allayed on the proposed merger of ABNL with Grasim was the telecom vertical. While Grasim had only about 4.7% stake in Idea, ABNL has 23.3%. Thus, a merger of ABNL into Grasim would have led to Grasim’s stake increasing about 28% in Idea. Such a merger would transform Grasim into a large conglomerate, with diverse unrelated businesses such as telecom, textiles, cement, etc. The scepticism of minority shareholders was also on the increased likelihood of Grasim’s balance sheet being leveraged for investments in unrelated businesses, particularly funding of telecom, which is burdened with high debt. 

If the merger goes through, the Vodafone-Idea combine would lead to a stronger telecom entity. It would have 43% revenue market share, as against 33% of Bharti Airtel currently and 13% for Reliance Jio by FY19, said analysts at CLSA. They add that a deal could boost the merged entity’s Ebitda (earnings before interest, taxes, depreciation and amortisation) by 25-30%, led by savings in network and selling, general & administration costs, and a lower net debt to Ebitda ratio of 3.3.

With a stronger and more profitable business vertical, with lower debt and synergy benefits, investors’ concerns on telecom should ease. Also, though details on how a Vodafone-Idea merger would happen are not known, there are expectations that stakes of group companies in Idea should reduce, with Vodafone acquiring control. 

A K Prabhakar, head of research at IDBI Capital, says the telecom vertical was consuming a lot of debt and the return ratios were low. 

After merger with Vodafone, the promoters can concentrate on the other business verticals, a positive for ABNL or Grasim. These other verticals are driving growth and churning cash. This cash could be used for more productivity and profitable businesses, leading to higher shareholder return.

Mayuresh Joshi, fund manager and vice-president at Angel Broking, says although it is premature to arrive at any conclusion, with no details on valuation, swap ratios, etc, any consolidation will be positive for all telecom companies. And for the holding companies of Idea (ABNL) and private equity investors.  

The clear implications can only be arrived at after the valuation that Idea will garner or the swap ratio and other related information is made known.

Financial advisor S P Tulsian says the Street was factoring losses in the telecom business and, hence, the group exiting its telecom business will be seen as positive for all companies holding stakes in Idea—ABNL, Grasim and Hindalco. Hindalco, which holds about 6.33% stake in Idea, saw its stock price gain 0.85% on the bourses.

Grasim declared its December quarter results on Monday. It said the process of seeking the requisite regulatory approvals for the composite scheme of merger of ABNL with the company was underway and expected the transaction to be completed in the first half of the coming financial year.