Lakme-Indian Hotels Merger Thwarted

Institutional investors have forced the Tatas to abandon plans to merge the erstwhile cosmetics major Lakme Ltd with another group company, Indian Hotels.

Institutional investors including UTI and mutual funds like Morgan Stanley told the Tatas categorically that they do not support the plans for a merger. Without support from institutional investors, it would have been difficult for the promoters to get the merger proposal passed at the extra-ordinary general meeting since they only hold 23 per cent of the companys equity, said a senior UTI official.

Instead, the institutions wanted the company to pay out the proceeds of the sale of the cosmetics business to Hindustan Lever (HLL) as dividends. Institutions were also unhappy at the prospect of owning shares of a hotel company.

 

After the sales of the cosmetics business to Hindustan Lever in February, there were protests from investors who said that they were shareholders of a shell company with little hope of future value addition. The Tatas had toyed with the idea of merging Lakme Ltd with Indian Hotels as it would have retained the funds received from Hindustan Lever for the sale of business within the group.

Lakme received Rs 200 crore from Lever for the sale of the brands, trademarks and its 50 per cent stake in Lakme-Lever. It is also set to receive Rs 134 crore for the sale of its two manufacturing plants. After redeeming Rs 70 crore worth optionally fully convertible debentures placed privately with HLL, Lakme would be left with cash of Rs 260 crore.

However, institutional investors in Lakme felt the merger to be an unwise move and wanted to benefit from the sale of Lakmes assets through dividends. A merger would also have given Indian Hotels a new business of retailing which it did not want and which clashed with its current plans of restructuring its operations to make it more leaner.

Lakme has already announced its intention to pay an interim dividend of Rs 60 per share to be followed by an even more substantial figure at a later date. The extraordinary general meeting to be held in Mumbai today will consider the resolution to pay the interim dividend plus a host of others dealing with the sale of the plants and the business.

It is also likely to retain Rs 50 crore from the sale proceeds to invest in the Littlewoods retailing business.