Divide & Conquer | Value Research If ‘divide and rule’ was the mantra of the colonialists, “divide and grow” is that of India Inc.
Special Report

Divide & Conquer

If ‘divide and rule’ was the mantra of the colonialists, “divide and grow” is that of India Inc.

If ‘divide and rule’ was the mantra of the colonialists, “divide and grow” is that of India Inc.

Look around. For Corporate India, a split or a division of business has become a harbinger of opportunities. Of course, when it is a family empire at stake, then the sheer weight of shared history and bad blood sets the stage for a riveting exchange. Thanks to the Ambanis, Bajajs, Sheths (GE Shipping), Kasliwals (S Kumars) and the Piramals (Nicholas Piramal, VIP), our appetite has been well satiated.

But all splits are not tantamount to bitter feuds. In fact, it could be a shrewd and calculated move to unleash the latent potential of a business. One that shareholders would welcome. This trend has been evident over the past two years with several companies taking decisions to split or de-merge. The common reasons are management disputes or underperformance. Some, like Zee Telefilms, made a conscious business decision to have greater maneuverability. The rationale behind a split could simply be to enable each company to better focus on their core skills and business. When a company forays into new and unrelated businesses or, simply put, diversifies too much, it becomes difficult for investors and shareholders to assess the company. A split or de-merger is a logical outcome and the enterprise value of the new entity is able to attract a premium. Irrespective of the trigger, splitting a business unlocks shareholder value, contrary to the popular belief of wealth erosion. In fact, we have looked at some such examples where shareholders have been generously rewarded.

GTL is an IT player specialised in network services and infrastructure segments. GTL Infrastru-cture Limited (GIL) was formed as a 100 per cent subsidiary that focuses on telecom operators and IT-enabled service organisations. On September 2, 2005, the board announced that the shareholders of GTL would receive one share of GIL for every share of GTL. The demerger was approved on November 21, 2005. Consider this: On September 5, 2005, GTL closed at Rs 121.25 and the closing price on March 23, 2007, was Rs 138.55. GIL, which got listed on November 9, 2006, closed at Rs 43.50 and its closing price on March 23, 2007, was Rs 31.60. GTL had touched a high of Rs 178 on May 9. Shareholders would have got an absolute combined gain of 40 per cent.

Television Eighteen India
TV18 India de-merged into two entities: TV18 India and Network 18 Fincap. CNBC Awaaz, CNBC TV18 and all the websites become the property of TV18 India. Network 18 would be the holding company for TV18 India and CNN-IBN. TV18 India would also hold a portfolio investment stake in CNN-IBN.

For every 100 shares held of TV18, a shareholder received 140 shares of TV18 India and 120 shares of Network 18. The price of 100 shares of TV18 India was Rs 89,500 on November 16, 2006. The next day, the scrip was delisted from the exchanges. On December 27, 2006, TV18 India was relisted and the closing price was Rs 618.35. Network 18 was listed on February 2, 2007. The stock opened at Rs 312.10, touched an intra-day high at Rs 398.80 and closed at Rs 367.10.

At the closing price on March 23, 2007, the combined worth of 140 shares of TV18 India and 120 shares of Network 18 was Rs 1,26,070. In a nutshell, Rs 89,500 became Rs 1,26,070 in around four months, a gain of around 41 per cent.

Zee Telefilms
This media stock had an interesting process of splits.

The news gathering business of Zee Telefilms was transferred to Zee News Limited (ZNL) on October 1, 2005. The cable distribution moved from ZNL to Wire and Wireless India Ltd (WWIL) on March 31, 2006, and the direct-to-home business came under ASC Enterprises on April 1, 2006. ASC Enterprises has been renamed Dish TV India Ltd. and Zee Telefilms was renamed Zee Entertainment Ltd.

For 100 shares of Zee Telefilms, a shareholder would have got 100 shares of Zee Entertainment, 45 shares of ZNL, 50 shares of WWIL and 57 shares of Dish TV.

IndiaBulls Financial Services
Indiabulls’ move to de-merge its real estate business into a separate company — Indiabulls Real Estate — has loaded investors with windfalls. Under the de-merger plan, all shareholders of IBFSL were issued shares of Indiabulls Real Estate in the ratio of 1:1 (face value Rs 2).

Indiabulls Real Estate got listed on March 23, 2007 at Rs 380.05. Had you invested in IBFSL on May 2, 2006 at a share price of Rs 326.7, you would have been sitting on a gain of 126 per cent based on the closing prices of IBFSL and Indiabulls Real Estate as on March 23, 2007. Under the new dispensation, the holdings of IBFSL in various real estate projects have shifted to the new company. There's more. On splitting, both companies have lined up ambitious plans in their respective fields.

Indiabulls Real Estate has projects in Tier I cities and plans to develop 19-acres of NTC mill land and set up an SEZ over 6,000 acres in Maharashtra. The company features in the 30 best companies in Asia in CLSA’s model portfolio. Steel baron LN Mittal has hiked his stake in the company and US-based hedge fund Farallon Capital is also buying stake in it.

IndiaBulls Financial Services, one among the 68 Indian blue-chip companies in MSCI, is focusing on the rapidly growing consumer finance industry. The business is being seen as the key earnings growth driver for the company.

Great Eastern Shipping
On September 15, 2005, the company declared that it would spin off its offshore business into a separate company, Great Offshore. As per the proposal, if one held 100 shares of GE Shipping, the holding was to be reorganised into 80 shares of GE Shipping and 20 of Great Offshore. The GE Shipping scrip closed at Rs 211 that day. But the sail to the demerger proved to be a choppy. ONGC, an important customer in the offshore business, questioned the financial strength of the offshore arm and demanded that GE Shipping continue to provide financial guarantee to Great Offshore. Thanks to the ONGC stand and a delay in securing other approvals, the company could not complete the de-merger process within the stipulated timeframe given by the court. Consequently, GE Shipping called off the demerger proposal.

The company scrip gained a tad 5.8 per cent between the day of the de-merger announcement (Sept-ember 15, 2005) and the board calling off the recast plan to re-examine new ways for restructuring its business (August 2, 2006).

On August 9, 2006, the company revived its de-merger scheme. Under the new plan, K M Sheth, chairman of GE Shipping, would be the non-executive chairman on Great Offshore board, Vijay Sheth was to be the managing director, and the board of directors would differ from the GE Shipping board. All the assets under the offshore division as on March 31, 20005, were to be shifted to the new company. Finally, Great Offshore made its way to the bourses on December 21, 2006 to get listed at Rs 702. Had one bought GE Shipping shares on September 15, 2005 and held them through the entire episode, he would have made an annualised profit of 18.17 per cent.

Not much compared to the Sensex's return of 37.02 per cent during the same period. The good news: investors would have made more money in GE Shipping as compared to the returns given by its peer companies.

KEC International
When the company split into two - KEC Infrastructure and KEC International - existing investors were offered one share in each company for every share they held. KEC International carries on the core business of turnkey power projects and KEC Infrastructure, which has now become the realty arm of the group, holds investments in group companies and non-core advances divested from the parent company.

From an investor’s point of view, the recast has brought handsome returns coupled with a stake in two companies with focus in potentially high growth areas —power and infrastructure. The share price of the company has been improving gradually since the scheme became effective in December 2005. An investment of, say, Rs 27,220 would have grown to Rs 54,475 (KEC International and KEC Infrastructure together) over a period of around 15 months, a return of 74 per cent.

Improving industry scenario, an order book jacked up by ever opening domestic and global opportunities and the KEC International’s move towards becoming a service provider are set to unlock huge value for the RPG group company.

Given the high visibility of revenues over the next three years, the company has the potential to surprise the markets time and again.

Reliance Industries
When kings fight, it is the soldiers who die.

When differences between the Ambani brothers surfaced and bubbled over, the bitter public battle, which spanned over seven months, kept the markets guessing whether the de-merger would herald good fortune or trigger a fall. Finally, Mukesh Ambani got RIL and IPCL and Anil Ambani was at the helm of Reliance Energy, Reliance Capital and Reliance Infocomm.

All RIL shareholders were issued shares of the de-merged companies in a 1:1 ratio. A shareholder with 100 shares of RIL got 100 shares of each of these companies: Reliance Communica-tions Ventures, Reliance Energy Ventures (REVL), Reliance Capital Ventures (RECL) and Global Fuel Management Services. After the amalgamation of REVL with Reliance Energy and RECL with Reliance Capital, shareholders were offered 7.5 shares of Reliance Energy for 100 shares of REVL and 5 shares of Reliance Capital for 100 shares of RECL. Mukesh had complete control over the oil exploration, refining, petrochemicals and textile businesses (RIL and IPCL). Reliance Life Sciences (biotech firm) and Trevira (European company manufacturing polyester fibres) also landed in his fold. RIL merged with IPCL and Reliance Petroleum went ahead with its IPO.

RIL’s three rigs will operate for the first time in KG basin in FY08. Mukesh now wants a slice of the retail sector and has committed Rs 70,000 crore towards that end. RIL has also committed huge funds to set up SEZs across the country. After the de-merger of the group was announced in early-June 2005, the share price of RIL climbed from Rs 548.8 (June 5, 2005) to Rs 1,379 (March 23, 2007), an annualised return of 65.32 per cent.

Anil is going great guns too. Since its listing on March 6, 2006, Reliance Communications has appreciated almost 42 per cent. It is among the largest telecom companies in India. Reliance AMC, controlled by Reliance Capital, is among the top mutual fund houses managing assests of Rs 45,000 crore. Power Utility Reliance Energy has chalked out ambitious plans to augment its power generation capacity to 10,000 MW by 2010-12. This plan also includes its interest to venture into nuclear power projects.

There could be more oppourtunity ahead. Companies like Bajaj Auto, Max India, Aditya Birla Nuvo and ICICI Bank might hive off their life insurance/asset management business when they get in black. Gammon India is also in the process of listing a new company for its infrastructure business.

A word of caution here. Some of these might prove to be a disaster.

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