Nuvo-Grasim merger fails to impress investors

Nuvo falls 18%, Grasim closes flat; both lose Rs 9,935 crore of market value this week

A day after Aditya Birla group announced the merger of AB Nuvo with Grasim Industries to create an entity with Rs 60,000-crore annual revenue, shares of both companies fell on the stock markets — indicating investors’ ire. AB Nuvo closed the day with 18 per cent loss, while Grasim, after an initial fall, recovered to close flat. Both stocks ended with a loss of Rs 9,935-crore market value in this week’s trading as news of the merger trickled in.

On Friday, as soon as the markets opened, investors sold shares of AB Nuvo, which fell almost 25 per cent. It recovered by 7 per cent to close at Rs 1,290 a share. Similarly, Grasim shares fell by 8 per cent before recovering to close flat at Rs 4,565 a share. Grasim shareholders are jittery that the company will now attract an increased holding company discount of 30 per cent, instead of the earlier 20 per cent.

“We believe the (Nuvo-Grasim) transaction adds to the confusion and creates a complex conglomerate, with multiple businesses sharing no commonality whatsoever. The transaction requires a minority shareholders vote which may be an uphill task, in our assessment,” said an analyst with global brokerage firm, CLSA.

On Thursday evening, the Birlas had announced a two-step merger in which Aditya Birla Nuvo will be merged with Grasim first and then the financial services business would be hived off from “New Grasim” and listed by May next year. As per the scheme, for every 100 shares in AB Nuvo, an investor will get 30 shares of Grasim and 210 shares of the financial business, whereas a shareholder with 100 shares in Grasim will get 700 shares of the financial unit. Kumar Mangalam Birla, Chairman, Aditya Birla group said on Thursday the merger was to simplify the holding structure of the group and to ensure stable cash flows for new businesses and unlock value of the financial services business of AB Nuvo, apart from reducing the cross-holdings.

"This merger is to play the India growth story," he said.

But the investors did not seem to be totally convinced about it and wanted the Birlas to sweeten the deal. Analysts said the concerns regarding increasing complexity with the addition of several non-core businesses into Grasim remain. "We believe that rising complexity will result in a reversal of this trend. Also, while management clearly stated that capital allocation or support to the telecom business was not a consideration for the merger, they did not categorically deny the possibility of the same in the future," said an HSBC analyst.

Hugh Young, MD of Aberdeen Asset Management Asia, which holds 6 per cent stake in Grasim, said shareholders are worried that the holding company discount of Grasim would further increase post the merger. "The fund will now try to understand the management's philosophy and long-term objectives behind the decision and then take a call on whether to increase or cut stake in Grasim," he told a TV channel.

Analysts said given the varied nature of businesses, shareholders of both the companies would have concerns on capital allocation and business complexity. In addition, the continued stake by Grasim in financial services as against a total direct exposure by shareholders could be an important area of concern. The ABNL shareholders are apprehensive that their exposure to high growth financial services business is now diluted.

"It would require serious persuasion by the management on positives from the deal to win minority confidence and there may be uncertainty on this aspect," analysts said.

The ball is now in the Birla's court.