Session1 Kumarmanglam Vijay

Unlocking Value through - Demerger and Slump Sale06 April 2011

Kumarmanglam Vijay

Unlocking Value through - Demerger and Slump SalePage 2

Contents

Reorganization tools: A snapshot

Demerger – Concept

Slump sale – Concept

Why Demerger / spin offs - Case studies


Reorganization tools: A snapshot

Reorganizationof CAPITAL

Reorganizationof CAPITAL

Equity buy back

Equity buy back

Capital reduction

Capital reduction

Public offerPublic offer

Enhancing stake / capital repatriation

Financial restructuringEnhancing stake

/ repatriation

Enhancing stake / delisting

Tool Business objective

Reorganizationof BUSINESS

Reorganizationof BUSINESS

MergerMerger

De-merger/ hive - off

De-merger/ hive - off

AcquisitionsAcquisitions

Consolidation of businesses / entities

Divest non-core business

Acquiring interest in new business/ entity


Demerger – Concept

► Transferor Company to demerge its Business B to the Transferee company through a scheme of arrangement under a High Court driven process under section 391-394 of Companies Act, 1956

► In consideration, company which acquires business (resulting company) issues shares to shareholders of selling company (de-merged company)

Pros

► Segregation of business verticals into independent entities

► ROCE, RONW separately captured for each business

► Market / regulator perception friendly

► Automatic listing of Transferee Company

► Demerger to be tax neutral provided prescribed conditions are fulfilled

Cons

► Limited leveraging capacity on demerger of listed entities

► Twin listed entities

► Classical demerger requires transferee to reflect assets at book value

Transferor CompanyTransfereeCompanyTransfereeCompanyBusiness A Business B

Shareholders of transferor company

Shareholders of transferor company

Demerger of business B

Consideration in form of shares of

resulting company

Transaction

Post demerger scenario

Transferor CompanyBusiness A

Transferor CompanyBusiness A

ShareholdersShareholders

Transferee CompanyBusiness B

Transferee CompanyBusiness B


Slump sale – Concept

► Seller company to transfer Business B as a going concern to the Buyer company on slump sale basis

► In consideration, the buyer company can issue shares / pay cash to Seller

► Mode of transfer can be :

► Business Transfer Agreement

► Scheme of Arrangement u/s 391-394 of Companies Act

Pros

► Maximum opportunity for leveraging stake for raising funds

► Segregation of business verticals into independent entities

► ROCE, RONW separately captured for each business

► Recognition of purchase consideration in value of assets in Buyer’s books

Cons

► Shareholders perception – Step down of business assets

► Transaction chargeable to capital gains tax

► No flexibility to determine date of transfer – To be effected from the current date (in case of BTA)

► Automatic listing of Buyer Company – Not possible

Seller CompanyBuyer

CompanyBuyer

CompanyBusiness A Business B

Shareholders of Seller companyShareholders of Seller company

Slump sale of business B

Consideration

Shareholders of Buyer companyShareholders of Buyer company


Why Demerger / spin offs

2. Facilitate strategic investment2. Facilitate strategic investment

5. Settling family agreements5. Settling family agreements

4. Regulatory reasons4. Regulatory reasons

3. Unlocking shareholder value3. Unlocking shareholder value

7. Streamlining groups business operations7. Streamlining groups business operations

6. Divestment6. Divestment

1. Focus on core competencies / Recapitalization1. Focus on core competencies / Recapitalization

8. Hiving off non core assets8. Hiving off non core assets

Note: Case studies discussed in the subsequent slides are based on publicly available information


Bajaj AutoBajaj Auto

Maharashtra Scooters

Maharashtra Scooters

Bajaj Auto Holdings

Bajaj Auto Holdings

Allianz Bajaj Life Insurance Company

Allianz Bajaj Life Insurance Company

Bajaj Allianz General

Insurance Co

Bajaj Allianz General

Insurance Co

PT Bajaj Auto Indonesia

PT Bajaj Auto Indonesia

ICICI BankICICI BankBajaj Hindustan

Bajaj Hindustan

95%

Public

4%5%

6%50%

100%Allianz

74% 26% 74% 26%50%

Allianz

50%

9%

Public

57%

PublicPublic

49%24%

Bajaj Auto Finance

Bajaj Auto Finance

Bajaj Allianz Financial

Distributors

Bajaj Allianz Financial

Distributors

38%

0.05%

Promoter GroupPromoter Group30% 68%

Allianz

PublicPublic

Focus on core competencies – Bajaj AutoPre - Demerger structureFocus on core competencies – Bajaj AutoPre - Demerger structure


Focus on core competencies – Bajaj AutoSplit MechanicsFocus on core competencies – Bajaj AutoSplit MechanicsBajaj Auto incorporated two wholly owned subsidiaries & pre capitalized them to the extent required:

► Bajaj Holdings and Investment - Rs 43.5 cr (4.35 cr shares @ Rs 10)

► Bajaj Finserv - Rs 21.75 cr (4.35 cr shares @ Rs 5)

Bajaj Auto demerged identified businesses in the following manner:

Bajaj Holdings and Investment► 2-wheeler and 3-wheeler business

► Investment in PT Bajaj Auto Indonesia

► Cash

Bajaj Finserve► Wind power business

► Investment in Bajaj Auto Finance Limited

► Investment in insurance business

► Cash

Bajaj Auto retained remaining assets and liabilities, investments and balance cash and cash equivalents

Scheme of arrangement provided for:

► Issuance of shares to the share holders of Bajaj Auto in the ratio of 1:1

► Such that post demerger, Bajaj Auto continue to hold 30% stake in respective companies with balance being held

by shareholders of Bajaj Auto in proportion of their holding

► Bajaj Auto to be renamed Bajaj Holdings and Investment Ltd ‘BHIL (New)’

► Bajaj Holdings and Investment Ltd to be renamed Bajaj Auto Ltd ‘BAL (New)’


Bajaj Holdings India Limited

Bajaj Auto Ltd.Bajaj Auto Ltd. Bajaj Finserv LimitedBajaj Finserv Limited

Promoter Group Promoter Group PublicPublic

30% 68%

► 2-wheeler and 3-wheeler business► Investment in PT Bajaj Auto Indonesia► Cash

► Wind power business ► Investment in Bajaj Auto Finance Limited► Investment in insurance business► Cash

1Was known as Bajaj Auto Ltd. Before restructuring

2 Was known as Bajaj Holdings and Investments Ltd.

21%48% 48% 21%

30% 30%

Focus on core competencies – Bajaj Auto Post restructuringFocus on core competencies – Bajaj Auto Post restructuring


Facilitate strategic investment – Volvo & Eicher Motors► Swedish major AB Volvo and commercial vehicle producer

Eicher Motors Limited proposed to enter into a joint

venture deal

► Key parameters

► Investment in an Unlisted company

► Efficient utilization of cash invested for future growth

► Eicher Motors Limited (EML) transferred its Commercial

Vehicle and Components & Engineering Design Services

business, to its step down unlisted subsidiary (JV Co) on a

slump sale basis

► Volvo subscribed to shares of JV Co for USD 275 million

cash consideration and demerged after sales services

division of its wholly owned subsidiary (worth USD 75

million) to JV Co.

JV CoJV Co

VolvoVolvoEMLEML

Slump sale of Commercial Vehicle

business

54.4% 45.6%


► Demerger of Consumer Product Division

(CPD) from Cadila Healthcare Ltd. ‘CHL’ to

Carnation Nutra – Analogue Foods Ltd.

‘CNAFL’; and

► Merger of ZHMRPL into CHL

Unlocking shareholders value – Cadila Healthcare

ZHMRPLZHMRPL

CHLCHL

CNAFLCNAFL

72%

62%

CPD Pharma

PromoterPromoter

Public

Public

38%28%

100%

CPD

CHLCHL

CNAFL*CNAFL*

74%

71%

PromoterPromoter

Public

Public

29%

26%

CPD

Pharma

End structureBegin structure

Date Key event04 Jul 2008

CHL Board approval for Scheme

18 Sep 2008

Shareholders and creditors approval for Scheme

23 Oct 2008

High Court approval for the Scheme

05 Jan 2009

Record date for demerger

04 Feb 2009

Amalgamation record date

20 Feb 2009

Listing of CNAFL shares issued on demerger

02 Mar 2009

Listing of CHL shares issued on merger


Unlocking shareholders value – Cadila Healthcare

Particulars 5-May-08 5-Jun-08 4-Jul-08 18-Sep-08 1-Dec-08 2-Mar-09 1-Sep-09 31-Mar-10 1-Jun-10

CHL (Rs. cr) 3,730 3,707 3,930 4,020 2,889 5,677 6,153 11,261 12,635

Sensex 17,491 15,770 13,454 13,316 8,840 8,607 15,551 17,528 16,572

Heathcare Index 4,296 4,346 4,123 3,814 2,840 2,586 3,847 5,328 5,489

Graph showing movement in market cap of CHL vis-à-vis Sensex and Healthcare index

Board meeting Listing


Unlocking shareholders value – Cadila HealthcareGraph showing movement in market cap of CNAFL vis-à-vis Sensex and Healthcare index

Board meeting Listing

Particulars 5-May-08 5-Jun-08 4-Jul-08 18-Sep-08 1-Dec-08 20-Feb-09 1-Sep-09 31-Mar-10 1-Jun-10

CNAFL (Rs. cr) 54 54 52 56 34 254 676 1,491 1,844

Sensex 17,491 15,770 13,454 13,316 8,840 8,843 15,551 17,528 16,572

Heathcare Index 4,296 4,346 4,123 3,814 2,840 2,596 3,847 5,328 5,489


► Only 26% total foreign equity shareholding allowed in News business

► Only 49% total foreign equity shareholding allowed in Cable business & Direct to home (DTH) business

Indian promoters

Indian promoters

Foreign Promoters

Foreign Promoters FIIFII

Balance (including

public)

Balance (including

public)

Zee Telefilms

News business

News business

DTH business

DTH business

Cable business

Cable business

24% 22%31%23%

Regulatory Reasons – Zee Telefilms


Cable and DTH business

► Cable and DTH business of Zee were demerged into two

separate companies

► Part of the foreign promoter holding in the new company

was transferred to Indian promoters to meet regulations

News business

► News business of Zee was demerged into a new

company

► Entire Foreign promoter holding in the news company

was transferred to Indian promoters and FIIs were

issued Preference shares in excess of their 26% holding

in Zee

Zee News LtdZee News Ltd Wire & WirelessWire & Wireless ASC EnterpriseASC Enterprise

ShareholdersShareholders

► Resulting structure FDI compliant.

► Possible to have a clear-cut leadership and direction for the growth of various businesses

► Ease of entry for strategic investors

► Substantial increase in market capitalisation of the companies post demerger

► Resulting structure FDI compliant.

► Possible to have a clear-cut leadership and direction for the growth of various businesses

► Ease of entry for strategic investors

► Substantial increase in market capitalisation of the companies post demerger

Regulatory Reasons – Zee Telefilms

(News Business) (Cable Business) (DTH business)


RILRIL

Financial services(Reliance Capital) Financial services(Reliance Capital)

Energy business(Reliance Energy)Energy business(Reliance Energy)

Telecom business (Reliance Infocom)Telecom business (Reliance Infocom)

InvestmentsPetroleum business

Settling family agreements – Reliance Industries

Agreement between the Ambani brothers for control of business

Energy, Financial Services and Telecom businesses demerged into separate companies Energy, Financial Services and Telecom businesses demerged into separate companies


► Put to rest the family agreement

► Resulted in dedicated management team for

each of the businesses

► Diversified business risk

► Facilitated investors / strategic partners for each

business

► Growth story in each business segment

► Energy

► Financial Services

► Telecommunications

Demerger resulted in increased shareholders valueDemerger resulted in increased shareholders value

Reliance Group Market prices (In Rs)

Pre demerger Post demerger

Reliance Industries 702 698

Reliance Capital Ventures - 23

Reliance Communication Ventures - 292

Reliance Energy Ventures - 43

Reliance Natural Resource - 18

TOTAL 702 1074

Settling family agreements – Reliance Industries


Divestment - Piramal Healthcare Limited

► Piramal Healthcare Limited (PHL) engaged in Domestic

Formulation Business in India, Nepal and Sri Lanka to

Abbott Healthcare Private Limited (AHPL) for USD 3,720

mn ( Rs 17,000 cr)

► Assets transferred include manufacturing facility at

Baddi and rights to approx 350 brands and trademarks

► USD 2120 mn is payable on closing of sale and USD

400 mn is payable upon each of the subsequent 4

anniversaries of the closing commencing 2011

► The business was sold to AHPL as a slump sale on a going

concern basis

► Post slump sale, PHL offered to buy back shares from

existing shareholders

AHPLAHPLPHLPHL

Slump sale of Domestic Formulation Business for

USD 3,720 mn

Public & PromotersPublic & Promoters


Hiving off non core assets Hiving off Tower assets by Telcos ► Evolutionary years of Telecom business in India forced

Telecom companies to invest in captive Infrastructure

(towers) on their own

► Gradually concept of sharing of infrastructure developed

► To unlock value from passive assets, Companies hived off

Telecom infrastructure to subsidiaries / companies where

infrastructure could be used by multiple operators

► Demerger carried out under a High Court approved

Scheme of Arrangement

► Not a classical demerger

► No shares issued pursuant to demerger

► Investments sought in the Infrastructure company

Demerged to 100% subsidiary

Telecom Company Ltd.Telecom Company Ltd.

Telecom infrastructure

Telecom Infrastructure Company

Telecom Infrastructure Company

InvestorInvestor

Telecom Services business

Telecom infrastructure

Thank youKum arm anglam Vijay

Em ail: kum arm anglam .vijay@ in.ey.com

M obile: +91 9818621404


Demerger - Tax implications

Conditions prescribed for a ‘tax neutral’ de-merger

► All properties and liabilities of undertaking being transferred, should be transferred to the resulting

company and transfer should be at book value. Liabilities to include:

► Liabilities which arise out of activities or operations of the undertaking

► Specific loans or borrowings (including debentures) raised, incurred and utilized solely for activities or

operations of the undertaking; and

► General or multipurpose borrowings to extent of following amount:

Total of such borrowings X Value of assets transferred in de-merger

Total value of assets of such de-merged company

► Consideration for de-merger should be met by issue of resulting company shares

► At least 3/4th of de-merging company shareholders should become shareholders of resulting

company

► Shares to be issued as consideration to shareholders on a proportionate basis

► Undertaking should be transferred on a going concern basis


Demerger – Process Overview

► Incorporation of New Co

► Preparation of Scheme of Arrangement

► Obtaining valuation report

► Devising strategies for receiving consent of creditors

► Analyze stamp duty costs

► Incorporation of New Co

► Preparation of Scheme of Arrangement

► Obtaining valuation report

► Devising strategies for receiving consent of creditors

► Analyze stamp duty costs

Board meeting to approve Scheme of Arrangement

Board meeting to approve Scheme of Arrangement

Final approval of de-merger by jurisdictional High Courts

Final approval of de-merger by jurisdictional High Courts

Application to High Court to convene / dispense meetings of shareholders and creditors to approve Scheme of Arrangement

Application to High Court to convene / dispense meetings of shareholders and creditors to approve Scheme of Arrangement

Conduct meetings as per the orders of High Court, if not dispensed with

Conduct meetings as per the orders of High Court, if not dispensed with

File Chairman’s report and petition with High Court

File Chairman’s report and petition with High Court

Follow up with Regional Director of CompaniesFollow up with Regional Director of Companies

File Court order with ROC and issue sharesFile Court order with ROC and issue shares

Documents

Session1 Kumarmanglam Vijay