Non-IT business demerger to benefit Wipro's minority shareholders

Earlier this month, the software exporter decided to separate the non-IT businesses to a new company Wipro Enterprises

Minority shareholders are likely to gain from demerger of Wipro's non-IT (information technology) business.

"Demerger is good for minority shareholders. Swap ratios indicate that Wipro's non-IT businesses are being valued at Rs 44.5 per share, which implies value of Rs 10,950 crore and 12.4% of Wipro's current market cap, despite just 6% contribution to EBIT (earnings before interest and tax)," Nimish Joshi and Arati Mishra, analysts with CLSA Asia-Pacific Markets, wrote in a recent note to their clients.

They added that this was "probably a first in restructuring of any kind in corporate India" where minority shareholders are likely to be benefitted.

"Importantly, the promoter is offering minority shareholders an exit at this elevated valuation by offering his shares in Wipro in exchange. Thus, the promoter is taking 6% of profits outside the company and offering 12% value in return," the analysts said.

Earlier this month, the software exporter said that it has decided to separate the non-IT businesses to a new company Wipro Enterprises. The new unlisted entity will include Wipro Consumer Care & Lighting, Wipro Infrastructure Engineering, and Medical Diagnostic Products & Services (through a strategic joint venture with GE).

The move was aimed to bring the best out of these businesses and allow the promoter to cut his stake in Wipro towards 75% to meet regulatory norms.

"This is positive for Wipro shareholders to the extent of 6-7%. By preferring the listed Wipro shares, current shareholders will receive additional 12.1% Wipro shares. However, removing the profit before tax accounted for by non-IT businesses (5-6%), this works to be a net benefit of 6-7%," Viju K George and Amit Sharma, analysts with JP Morgan, said.

As part of the deal, investors can receive one equity share with face value of Rs 10 in Wipro Enterprises for every five equity shares with face value of Rs 2 each in Wipro, or receive one 7% redeemable preference share in Wipro Enterprises, with face value of Rs 50, for every five equity shares of Wipro.

They also have the option to exchange the equity shares of Wipro Enterprises and receive as consideration equity shares of Wipro held by the promoter. The exchange ratio will be one equity share in Wipro for every 1.65 equity shares in Wipro Enterprises.

"Giving shareholders an exit option from an unlisted company, including through a share exchange benefits them. While investors can weigh the deferred cash against Wipro's shares, asking them to do so without any information on what are the management's plans for Wipro Enterprises is unreasonable," Institutional Advisory Services, a voting advisory firm that provides participants in the financial markets with independent opinions, said in its note.