3:10 Grasim Swap Ratio Cleared

The A V Birla group yesterday announced a 3:10 swap ratio for demerging the cement business of Indian Rayon & Industries, and its subsequent absorption into group flagship Grasim Industries.

Shareholders and GDR holders of Indian Rayon will receive three shares of Grasim for every 10 shares or GDRs held by them in Indian Rayon.

The boards of the two companies yesterday approved the ratio calculated by N M Raiji & Co and Bansi Mehta & Co. The demerger is effective from September 1, 1998.

The deal, structured by DSP Merrill Lynch, calls for elimination of cross-holdings between the two companies. Grasim's 4.4 per cent stake in Indian Rayon will be cancelled, leading to the promoter's holding in Grasim falling from 22 per cent to 20 per cent.

 

As a result, Grasim's equity will increase from Rs 72.3 crore to Rs 91.7 crore, while Indian Rayon will be freed of long-term debt amounting to Rs 437 crore, thereby lowering its debt-equity ratio from 0.5:1 to 0.4:1.

Grasim's long-term debt will surge 21 per cent to Rs 1,897 crore, leading to a rise in its debt-equity ratio to 0.7:1 from 0.6:1.Addressing reporters in Mumbai yesterday, A V Birla group chairman Kumar Mangalam Birla said the group planned to increase its holding in Grasim following the equity dilution due to the restructuring, and in Indian Rayon as the holding is quite low at 18.5 per cent.

Declining to specify the target for the proposed stake hikes, he hinted, "we can use the creeping acquisition route to buy 2 per cent every year."

Birla also announced that the group will restructure the balance sheets of both companies by buying back shares, after buyback was permitted. "We plan to buy back between 15-20 per cent of each company's equity," Birla explained.

Birla said the group had appointed consultancy firm Boston Consulting Group to analyse the group's business portfolios, based on which the group will shape its future plans.

Two weeks back, the Grasim and Indian Rayon boards had given in-principle approval to the demerger scheme. Grasim's cement capacity will rise to 10.6 million tonnes, making it the second largest player after Larsen & Toubro.

The transfer of its cement business, which accounted for 45 per cent of the turnover in 1997-98, will deprive Indian Rayon of a large business, but will improve its cash flows and lead to its long-term debt declining to Rs 507 crore.

"Less than 37 per cent of Indian Rayon's net profit is getting transferred by this merger, while more than 60 per cent of its debt is going out, lowering its debt-equity ratio," said an analyst.

For Grasim, the restructuring will lead to a consolidation of its cement business. Its turnover is expected to rise 20 per cent to Rs 4,845 crore, and operating profit 24 per cent to Rs 865 crore.

Operating margin, buoyed by higher cement realisations in Karnataka (where Indian Rayon's plants are located), is expected to rise to 18 per cent from 17 per cent. Net fixed assets are slated to rise 23 per cent to Rs 3,267 crore.

Birla emphasised that Indian Rayon had strong businesses like viscose filament yarn (VFY), insulators and carbon black. He said further expansions and acquisitions in these areas will be financed from the cash flows generated by the VFY division.