Anuja AwasareIn June 2016, the promoter group of Excel Crop Care Ltd, the Shroff family, had entered into a definitive agreement to sell its 24.75% stake in the agro-chemicals firm to Sumitomo Chemical Company Ltd for ₹343 crore, Sumitomo Chemical also acquired around 19.98% in Excel Crop from private financial services firm Ratnabali Group (Public Shareholder of Excel Crop Care) for around ₹ 263 crore. These deals were struck at ₹1,259.36 a share, thus valuing Excel Crop at around ₹1,386 crore.
Moving on, Sumitomo Chemical Company (PAC) made an open offer to buy additional 30% stake in Excel Crop care through its Indian WoS Sumitomo Chemical India Private Limited, in which actuals were amounting to ₹277.29 Crore resulting in acquisition of 19.98% stake of ₹5/- per share at a premium of ₹1254.76.
Excel Crop Care Limited (ECCL) was incorporated in the year 2003 from a demerger of the agricultural inputs portfolio of Excel Industries Limited with the strength of three manufacturing units at Bhavnagar, Gajod and Silvassa. It is basically engaged in the manufacturing and marketing of Crop Protection, Soil Nutrition, Seed Treatment and Post-Harvest products. The current BSE market cap of the company is ₹4,204 Crores
Sumitomo Chemical India Private Limited (SCIPL), wholly owned subsidiary of Sumitomo Chemical Company, Limited, Japan (“SCC”) was established in year 2000 to drive the expansion of its Health & Crop Sciences business in India. SCIPL has 2 manufacturing plants, 1 Plant in Maharashtra and 1 plant in Gujarat.
Transaction
Synergy Benefits
- Post-merger Sumitomo Chemical India will have 5 manufacturing plants in West India. (2 plants of SCIPL plus 3 Plants of ECCL)
- The amalgamated company will have presence in both technical & formulation manufacturing. As SCIPL is into manufacturing formulations whereas ECCL is into Predominantly a formulation company with facilities for both formulation & technical.
- The company post-merger will possess 13,000+ distributors covering more than 85% of the geography pan- India – with improved depth and breadth of the distributors.
- There will be Optimal utilization of R&D facilities capable of creating new combinations using Sumitomo Chemical India’s chemistries.
- SCIPL is Specialty focused whereas ECCL is formulations focused, so post-merger, the product capabilities will consist of Specialty focused and Generic focused, thereby presence will be in complete range of products.
- Post-merger the company will emerge as Primarily an agrochemical company with presence in Animal Nutrition and Environment Health Products
- Well diversified product range covering multiple crop segments in both Kharif and Rabi season
- SCIPL has degree of engagement with farmers whereas ECCL has strong wide spread presence with the distributors/retailers, the amalgamated company will have strong presence with both the retailers and farmers.
- After acquisition by Sumitomo Chemicals, chances of it becoming a global supplier is very visible as Sumitomo has footholds in every country.
- Sumitomo Chemical might change that management style and may bring fresh blood and fresh thinking in the organisation.
- There will be a consolidation of major operations in India related to businesses of both the companies. However, further evaluation needs to be done whether there are any businesses in private company related to agriculture business.
Shareholding Pattern
Table 1: Pre & Post Transaction Shareholding Pattern
| Particulars | SCIPL (Pre-Transaction Shareholding) | ECCL (Pre-Transaction Shareholding) | SCIPL (Post-Transaction Shareholding) |
| SCC, Japan | 100% | 45% | 80.30% |
| SC Environmental Science Company | 0.0% (2 shares only) | – | 0.0% (2 shares only |
| SCIPL | – | 20% | – |
| Public | – | 35% | 19.70% |
| Total | 100% | 100% | 100% |
Please Note:
- The shareholding of Sumitomo Chemical India in Excel will get cancelled.
- The other shareholde₹ of Excel will receive equity shares of Sumitomo Chemical India which will be listed on BSE Limited and the National Stock Exchange of India Limited.
- Post-merger the name and registered office of Sumitomo Chemical India Private Limited will be changed.
- Post-merger, Sumitomo Chemical India will increase the public shareholding to 25% within a period of one year from the date of listing of its equity shares or as prescribed under the applicable regulations.
- It is expected that the merger will be completed and the equity shares of SCIPL will be listed in the next 8-14 months. The process of conve₹ion of private company into public company will be followed separately.
Table 2: ECCL Shareholding in case of merger of SCIPL to ECCL
| Particulars | ECCL (% holding) |
| Sumitomo Chemical Company Limited | 80.30% |
| SC Environmental Science Company Limited | 0% |
| Public | 19.70% |
| Total | 100% |
Swap Ratio is calculated as 39 shares of ECCL for every 1000 shares of SCIPL. Hence the reverse merger has resulted in increase in capital and liquidity.
Dividend
- In respect of accounting period prior to the effective date, both the companies shall be entitled to declare and pay dividends,
- In case if ECCL declares any dividend for FY 2017-18, then SCIPL shall be entitled to declare such dividend to its shareholders upto the extent of the dividend received by it from ECCL.
- ECCL and SCIPL shall be entitled to declare dividend or distribute capital in any form which is not covered under dividend declaration/ payment as stated in 1 and 2 above subject to certain conditions mentioned in the scheme.
- However, neither of the Companies shall declare any dividend or other distribution of capital or income, under point 3 above, in a particular financial year exceeding an amount equal to ₹20 Crores, without the prior written consent of the other Company.
Valuation
Appointed date is 1st April 2018 and the swap ratio decided 51 fully paid-up equity shares of Sumitomo Chemical India of face value of INR 10 each for every 2 fully paid-up equity shares of face value of INR 5 held in Excel as on the record date.
Valuation is done as per Fair Equity Share Exchange Ratio in which appropriate weights have been given to the values arrived at under each approach.
Table 3: Valuation of ECCL & SCIPL and Exchange Ratio (Deloitte Haskins & Sells)
| Valuation Approach | ECCL (Value per share ₹) | SCIPL (Value per share ₹) | ||
| Deloitte Haskins & Sells# | Desai Haribhakti & Co## | Deloitte Haskins & Sells# | Desai Haribhakti & Co## | |
| Income Approach-Earnings Capitalization Value Method | 4,145 | NA | 169 | NA |
| Income Approach- Market Price Method | NA | 4,101 | NA | 0* |
| Market Approach- Comparable Companies Method | 4,122 | 0* | 155 | 160 |
| Relative Value per share | 4,133 | 4,101 | 162 | 160 |
| Exchange ratio | – | – | 25.5 | 25.5 |
Please note: ECCL was valued at 4,548 Crores, while the value of SCIPL is ₹4,438 crores. SCIPL excluding its investments in ECCL gets valued at ₹3500 crores
*Value is zero has the respective method was not used for calculation
#Deloitte uses 50% Weightage for both the methods used to arrive at valuation of the company
Let us look at the value creation, if any to the shareholders of ECCL:
| Particulars | ECCL | SCIPL | Combined |
| PAT | 81.31 | 67.48 | 148.79 |
| EPS | 73.88 | 2.60 | 2.98 |
Accounting Treatment
SCIPL shall account for amalgamation in its books as per the ‘pooling of interest method’ of accounting prescribed under the Indian Accounting Standards 103 – Business Combinations prescribed under Section 133 of the Act.
| Elements | Treatment in the books of SCIPL |
| All Assets and liabilities as on the Appointed Date of ECCL | It shall be recorded at their existing carrying values and in the same form as at the Appointed Date. |
| All the reserves and surplus, including but not limited to the profit and loss account, of ECCL as on the Appointed Date | It shall be transferred to SCIPL at their existing carrying amounts and in the same form in which they appear in books of the ECCL. |
| The difference between the existing equity capital of the ECCL and the face value of equity shares issued by the SCIPL and the adjustments as per the scheme. | It shall be recorded/adjusted in the books of SCIPL as per the provisions of applicable accounting standards |
Product Synergy
Table 4: Product mix of both the companies for FY 17-18
| Products | ECCL (Revenue %) | SCIPL (Revenue %) | Post-merger SCIPL product synergy (Revenue %) |
| Insecticides | 42% | 53% | 46% |
| Herbicides | 29% | 2% | 18% |
| Fungicides | 10% | 6% | 7% |
| Metal Phosphide | 13% | NA | 8% |
| Plant Growth Regulators (PGR) | 6% | 26% | 15% |
| Animal Nutrition Division (AND) and Environment health division (EHD) | NA | 13% | 6% |
Financial performance
Table 5: Financials of ECCL & SCIPL (All figs in INR Crores)
| Particulars | 2016 | 2018 | ₹in crores | ||
| ECCL (Standalone) | SCIPL | ECCL (Standalone) | SCIPL | Combined (2018) | |
| Equity Capital | 5.50 | 232.99 | 5.50 | 274.59 | 499.15 |
| Reserves and Surplus | 373.96 | 63.07 | 514.52 | 816.67 | 835.13 |
| Networth | 379.46 | 296.06 | 520.02 | 1,091.26 | 1,334.28 |
| Secured Loans | 16.36 | – | 10.15 | – | 10.15 |
| Fixed Assets | 178.14 | 52.78 | 208.08 | 67.34 | 275.42 |
| Income from operations | 877.31 | 765.28 | 1,187.67 | 870.58 | 2,058.25 |
| Growth in operations (from 2016 to 2018) | 35% | 14% | |||
| Total Income | 880.98 | 791.06 | 1,190.42 | 896.53 | 2,086.95 |
| PBT | 81.65 | 107.05 | 121.62 | 104.77 | 226.39 |
| PAT | 59.58 | 64.62 | 81.31 | 67.48 | 148.79 |
Conclusion
The Japanese company Sumitomo Chemical Company Ltd marked its entry in crop protection business in India as its focus by incorporating it WoS in India-SCIPL, thinking from the long-term perspective it also invested in a well-established business of ECCL by acquiring controlling stake. Rational for creating huge paid-up capital of ₹499.14 crores of the merged entity having turnover of ₹ 2086 crores and PAT under ₹150 crores is not clear except that Sumitomo does not want legacy of Excel as the continuing company. Further, in the process, it gets the advantage of free reserves of ECCL while it can adjust consideration paid by SCIPL to acquire 19.98% stake ECCL against share premium account of SCIPL amounting to ₹235.06 Crores.
