Too clever by half

Indian tycoon's $9 billion tidy-up is too clever

Kumar Mangalam Birla has taken his tidy-up a step too far. The Indian tycoon is merging his two listed holding companies in a $9 billion deal. It helps to streamline his Aditya Birla conglomerate. But the overly complex deal gives investors on both sides reasons to grumble.

Aditya Birla Nuvo (ABN), which has interests in everything from insurance to telecoms, will be taken over by Grasim, which owns India's biggest cement company, UltraTech, and other chemicals and textiles businesses. The share swap is effectively a zero-premium merger based on stock prices before news of the deal began to leak. The enlarged entity will then separately spin off its financial services arm.

The deal will consolidate some small shareholdings in other publicly traded companies such as Aditya Birla Fashion & Retail but the tie-up creates more uncertainties than benefits.

ABN investors had hoped for a simple spinoff of the financial arm, which has come of age. This unit, which includes an insurer and a payments bank, has grown rapidly to account for 40 per cent of ABN's revenue. Shareholders baulked at sharing the spoils with outside investors, sending ABN shares down 18 per cent, for nearly $550 million of value destruction.

Grasim's investors fare better, but still sacrifice some focus and balance sheet strength. The company earns most of its revenue from cement. It will now end up with significant interests in telecoms and financial services. Gearing will also increase. Consolidated net debt was about 0.17 times Ebitda as of June. The latest figures for ABN show net debt, as of March, at 2.4 times.

Birla denies any plan to inject money from the new enlarged holding company into the listed telecoms business, Idea Cellular, to fund competition with a new entrant backed by Mukesh Ambani, India's richest man. But the new structure will certainly make it easier to fund capital-intensive businesses if it was required.

India's tough rules on related party transactions give shareholders an opportunity to block this union. The Aditya Birla Group has a solid reputation in India; it's a shame to muddy it with such an unnecessarily complicated deal.