DALMIA Group is on a massive business restructuring exercise. The group companies proposed three schemes one after the another which involved merger, reverse merger slump sale and slump exchange and reduction and reorganization share of capital and change in face value and shifting of private equity investors from unlisted company to listed company. It involved seven unlisted companies and two listed companies. Before analyzing the latest transaction, we mention two earlier consolidation exercises which are still pending before various stages of approval.

Scheme I

The consolidation of OCL India Limited (OCL), Dalmia Cement East limited (DCEL), Dalmia Bharat Cement Holdings Limited (DBCHL) and Shri Rangam Securities Holdings Limited (SRSHL) with Odisha Cement Limited (ODCL).

  • Transfer power, rail and solid waste management undertakings of OCL to ODCL by way of slump sale.
  • Amalgamation of OCL (post above step) with ODCL
  • Transfer rail and solid waste management undertakings of DCEL to ODCL by way of slump sale
  • Amalgamation of DCEL (post above step), SRSHL, DBCHL with ODCL.

The extent of the consolidation in the cement industry in the country is something to be watched closely.
After the consolidation, the total installed cement capacity of ODCL will be 9.3 MTPA, captive thermal power plant of 54 MW, solar power plant 8 MW and total installed refectory capacity of 131.4 KMT. It will also have adequate proven reserves of limestone in its captive mine and long-term contract for supply of clinker and slag with Jindal Aluminum Limited (JAL) and Steel Authority of India Limited (SAIL). The scheme involves only one of the listed company OCL.

Scheme II:

The consolidation of DCB Power and Ventures Limited (DCB power) and Adwentha Cement Holdings Limited (ACHL) with Dalmia Power Limited (DPL) and DCBL, respectively.

  • Transfer of power undertaking of DCB Power by slump sale to DCBL
  • Reduction of share capital of DCB power held by DCBL
  • Amalgamation of DCB Power (post above step) with DPL
  • Amalgamation of ACHL with DCBL

Post the transaction DPL will be privately owned by the promoters.

The proposed transaction of this scheme will be effective only after above two transaction becoming effective.

Scheme III encompasses following three companies

Current structure

  • As mentioned above ACHL will be merged in DBL therefore 7.38% stake of DCBL held by ACHL will also be transferred to DBL
  • On March 11, 2016 KKR Mauritius Cement Investments Limited were allotted 75,00,000 share approx. 8.45% stake in DBL on preferential allotment @ INR 827 per share (as against market price INR 718 as on March 17, 2016) for 15% stake of DCBL therefore DCBL will be WOS of DBL

Post Structure

Steps:

  • Reduction and reorganisation of share capital of ODCL
    (it is proposed to reduce the face value of share capital of ODCL from INR 10 per share to INR 2 per share)
  • Merger of DBL into ODCL with appointed date as January 1, 2015 under purchase method and reduction of share of ODCL held by DCBL and corresponding reduction of securities premium account of DCBL
  • Transfer of undertaking on slump exchange (cement undertaking, rail undertaking and solid waste management undertaking) from merged ODCL into DCBL

DBL has issued Employee Stock Options 9,93,000 against which equity shares are to be issued.

RATIONALE:

  • Financial of all the companies involved being efficiently pooled leading to centralised and more efficient management of funds, greater economies of scale, and a bigger and stronger resource base for future growth,
  • Simplification of corporate structure with one listed company controlling all the cement companies
  • The transferee company will have better leveraging capability due to its enlarged net worth base and increased business capability to offer a wider portfolio of products and services to its customers by virtue of its diversified business, enlarged resource base and deeper client relationships, thus improving its ability to effectively exploit the growing market potential and enhanced business prospects for the group.

MERGER OF DBL INTO ODCL

DALMIA Bharat Limited (DBL) is in possession of own various brands, such brands are used by various group companies. DBL also provides various management services to the group companies. Dalmia group is one of the leading players in the cement sector with installed capacity 25MTPA along with 186 megawatt (MW) of power generation capacity. It is fourth largest cement player after Ultratech, Holcim & Lafarge and Shree Cements. DBL through its subsidiaries owns

  • 100% of DCBL (12.1 MTPA)
  • 100% of Adhunik Cement Limited (1.5MTPA)
  • 97% of Calcom Cement (2.12MTPA)
  • 66% of ODCL (9.3MTPA)

DBL is well diversified geographically with 11 cement manufacturing facilities located in eight states across east and south India of which 48% of the cement capacities are located in southern India and balance 52 in eastern India (including north east) India.

Valuation

The appointed date was fixed at January 1, 2015, but the valuation is based on September 30, 2016 as the transaction is approved in the month November 2016. The swap ratio has been arrived as two equity share to be issued by ODCL to the shareholders of DBL holding one share equity share each.

With NCLT coming into picture, the time for execution of the Linked Transactions taken by each of the state’s NCLT is going to be crucial.

The valuation of DBL has changed dramatically between January 2015 to September 2016.

DBL valuation is arrived considering income approach, market multiple, market price traded on stock exchanges.

DBL valuation has incorporated for cash flows from the agreements entered with the group companies for brand and technical know-how (i.e. royalty income and management fees) and equity value of various subsidiaries, but to note is that they have not separately undertaken valuation of brand and technical know-how as they have just considered as relative valuation for merger.

Whereas ODCL valuation has been arrived considering DCF, market multiple and market price traded on stock exchanges.

There is various transaction which were executed

  • Ultra Tech Cement acquired Jaiprakash Associates 5 MTPA for INR 5,325 crore (approx. INR 10650 per tonne)
  • Birla Corp acquires from reliance 5 MTPA approx. INR 9520 per tonne.
  • Dalmia acquiring Bokaro Cement 2.1 MTPA capacity @ INR 1150 crore
  • Nirma Acquires Larfage Unit 11 MPTA capacity @ INR. 9520 crore

ACCOUNTING:

ODCL (books of the amalgamated company)

The accounting is done at purchase method therefore the equity issued is recorded at premium. The difference between fair value of equity shares issued over the book value of net assets if positive will be recognised as goodwill (i.e. underlying Intangible assets and residual Goodwill) and if negative then it shall be credited to capital reserve.

The reduction of equity share capital and Optionally Convertible Redeemable Preference share capital held DCBL into ODCL will credited to Capital Reserve Account.

DCBL (Books of subsidiary of amalgamating company)

Pursuant to merger of DBL into ODCL DCBL will be wholly owned subsidiary of ODCL. Therefore, there is reduction of holding by DCBL into ODCL effect of the same is given first against the business restructuring reserve and then securities premium account.

EMPLOYEE STOCK OPTIONS BENEFITS

In lieu of one stock option held by employee under DBL ESOP will be granted two stock options under a new employee stock option scheme framed by ODCL. The new options shall entitle to employee to purchase one equity share of ODCL for each new option. The terms and conditions of the new options so granted shall not be less favourable than those provided under the DBL ESOP Scheme 2011.

SLUMP EXCHANGE OF UNDRETAKING FROM ODCL INTO DCBL

The plants based in east (West Bengal, Jharkhand and Odisha) has been transferred as part of slump exchange to DCBL from ODCL.

The undertakings are transferred on slump exchange basis from ODCL to DCBL for lump sum consideration of INR 6,200 crore payable by issue of 7,97,94,080 equity shares of face value INR 10 each at premium of INR 767 per share.

ACCOUNTING FOR SLUMP EXCHANGE

ODCL (books of Transferor Company)

The difference arising between the net assets transferred and Equity share issued by DCBL shall recorded in the profit and loss account which shall be adjusted with securities premium.

DCBL (books of Transferee Company):

Record assets value as per allocation report to be prepared in accordance with Accounting Standard 10. Further it is clarified that goodwill having underlying intangible assets forming part of transferred undertaking which will have underlying intangible assets shall be transferred to and recorded by DCBL as intangible assets. The goodwill be depreciated and can be claimed in Income Tax by DCBL.

As mentioned above there are various transaction going on simultaneously and they are linked and to be executed in steps which might take long time and with the NCLT coming into picture how much time will be taken by different state NCLT as registered office is based in different state.

CONCLUSION

With this transaction the holdings company i.e. DCBL of ODCL has been converted as 100% subsidiary of ODCL. The merger of DBL in to ODCL may be with intension that DBL has lower assets than then ODCL as it major value is derived from its subsidiaries. Cement plants of eastern India (West Bengal, Jharkhand and Odisha) with capacity of 12.9MPTA are hived off from ODCL into DCBL and all southern cement plants continued to be owned by ODCL. This may be due to regulatory and legal compliance issues including captive mining rights and also have focused growth and expansion plan for both regions. The consolidation will help to group to focus on operation through one listed company and bring the investor at one stage.

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