The Quest For An Energiser

will have to tackle before they can smoothly move northward.

Mcleod Russel's (MRL) bid for the erstwhile Union Carbide (now Eveready Industries [EIL]) recently ended as a merger with the same company. Ever since the September 25 announcement, several theories have been floating around about why the merger actually came about.

But now that the step has been taken, the best way out is to try and ensure that the marriage does not go to the docks. Modelled more on the lines of the Hindustan Lever (HLL)- Brooke Bond Lipton India (BBLIL) merger, how the two companies manage the merger can only be found out by giving them time.

 

But for now, there are several points that still stand as doubts in the minds of market watchers.

First, there is concern expressed over the fact that the companies are looking at low-tech areas EIL (in India) can get into. Outside India, the brand name Eveready is owned by Ralston Purina, an MNC. Eveready, in fact, has also signed an agreement with Ralston for manufacturing alkaline batteries. And it is public knowledge that the global strategy for Eveready is to move into more high-tech products and markets.

Thus the recent development of EIL moving into low-tech areas does not jell with the overall global image of the company.

At this point, it would be interesting to note that in January this year, EIL announced that it had plans to enter the consumer goods sector, though the officials were tightlipped on where precisely they were headed.

But EIL director D Khaitan said the company had earmarked more than Rs 120 crore for investment in various projects in the next two to three years. And most of the funds were being sourced from internal accruals as well as through foreign loans.

Second, the swap ratio of 3:2 has implied that the combined capital base of Rs 600 crore is lower than the simple sum (Rs 650 crore) of the capital bases of the two companies put together (MRL, Rs 350 crore and EIL, Rs 300 crore).

That the combine has opted for a higher earning per share (EPS), the opportunity cost being lower borrowing power has not gone down well with the market watchers. True, that a lower capital base, given increasing earnings, will hike EPS. But given the pathetic condition of the stock markets, debt should continue to be an attractive proposition for a significant time now. And limiting access to this better option does not look a sound strategy. Especially when one considers that the companies are also talking of increasing marketshares and looking at new areas of operation. Probably the companies should have seriously thought this out before jumping into the merger.

Third, and most important, is the investor perception. There is a distinct feeling that the merger has been sought as an outlet for siphoning funds from EIL to MRL. The reason why this thought has crept into the market's mind can be traced back to the cash flows of the two companies.

MRL had tremendous cash flow problems in 1995-96. From operations, MRL saw a negative cash flow of Rs 4.14 crore (Rs 3.42 crore in 1994-95). The primary reason was the interest paid, which went up from Rs 2.47 crore in 1994-95 to Rs 9.34 crore in 1995-96. It was only sale of investments, which rocketed from Rs 2.84 crore in 1994-95 to Rs 49.57 crore in 1995-96 that put the cash back on the positive side of the balance.

On the other hand, consider EIL. For 1995-96, the company has a positive cash flow of Rs 30.9 crore from operations, against a loss of Rs 8.43 crore the previous year. A clear source of money for MRL.

But money is not the sole consideration. Though a major amount (Rs 34.24 crore) of the EIL's cash abundance went into ICDs last financial, the ICD market itself is falling. And the prospects of funding long-term assets with short-term funds, a measure adopted by MRL just some time back, are running out fast.

Also, there is only so much weight being given to the fact that riding on EIL's 400,000 strong retail outlets in the country, MRL has targeted sales of one million kg through Tez alone to capture almost four per cent of the market. Though EIL has experience in piling on products like detergents on its distribution setup, marketing tea and batteries are completely different.

There probably could be some lessons for both the companies in the fact that even HLL and BBLIL had both felt that the main point in their tieup was the combined asset base and not the marketing synergy.

That's all the more relevant in the present case, primarily because of the huge gap between the images of the two companies. MRL's presence in the packed tea market cannot be compared with that of EIL, which has more than 50 per cent of the batteries market.

Though the tea companies of the Williamson Magor group performed well last financial (see chart), MRL notched only a six per cent growth last year, compared with more than 12 per cent for EIL. And the tea busines is stagnant while the batteries sector is growing at 15 per cent anually. Clearly, it looks as if stagnant MRL is going to be a drag on the active EIL for sometime to come.

That does not augur well for EIL, which actually has shown good growth with a jump of 173 per cent in net profit (see chart). But the effects of an unhealthy partner is already beginning to show in EIL's books of accounts. A major part of Nestle's shares that were sold by MRL were purchased by EIL and another group concern Natex Investm-ent and Marketing.

In isolation, however, EIL is the stronger partner by far. The company is spending about Rs 20 crore in the first phase to set up a plastic processing unit. The unit will produce crates, containers etc, both for captive consumption and to cater to the battery operated appliances in the market.

In the dry cells segment, it is planning an expansion of capacities, both in the zinc-cadmium and alkaline batteries segment. The expansion programmes will cost around Rs 90 crore. A plant is also coming up in Madras for the manufacture of alkaline batteries. Ultimately EIL would like to manufacture the watch batteries, but that could take another five years at least.

Probably all these factors together are the reasons why the merger has not attracted activity in these counters in the stock markets. In BSE, for instance, there has been no trading on the EIL counter at all, though NSE has recorded some activity.

In fact, after September 9, when 200 EIL shares were traded at Rs 148, the next trade was recorded on the date of teh merger announcement, Sep-tember 25. Then the price was Rs 135 for the same number of shares traded: 200.

Again, MRL trading volumes have been limited to a range of between 100 and 700. The prices of the scrips have not uncdergone any major changes during this period (see chart).

Another explanation for the low movement is the shareholding pattern of the two companies. The B M Khaitan group has a dominant stake in both the companies. In MRL, the figure stands at 62 per cent and in EIL, the figure is 64 per cent.

Moroever, institutional interest in this scrip is not high, which leaves only the small investor to show dynamism. And the EIL shareholding pattern shows that nearly 56 per cent of the company's base is held in bundles of 1-100 shares (sse chart).

The only debate about the price movement was that the swap ratio that was fixed turned out precisely to be the one in which the scrips were trading during the period immediately before the announcement. Though the company has firmly denied any insider activity behind it, the doubt has not been eradicated from the minds of the investing lot.

Another interesting aspect to watch out for could be that the promoters' stake in the combine will drop to 46 per cent from the 60-plus figures, because of the cancelling out of cross holdings.

Summing up, the outlook for the merger is not all that good, though one cannot but mention that both these companies are potential bets that could spring surprises in the market. But their prospects will have to be taken with a pinch of salt.