Hindustan Media Ventures Limited (HMVL) is one of India’s leading print media companies with its distribution spread across Delhi-NCR, Uttar Pradesh, Uttarakhand, Bihar and Jharkhand. Incorporated in July 9, 1918 under the Indian Companies Act, 1913, the company is engaged in the printing and publishing of the flagship Hindi newspaper ‘Hindustan’, which is the second largest daily of India, based on total readership. It holds the leading position in Uttarakhand, Bihar and Jharkhand and ranks second in UP and Delhi. HMVL also publishes two Hindi magazines ‘Nandan’ and ‘Kadambini’. The equity shares of the company are listed on BSE and NSE, the market capitalization of the company on BSE is Rs 1,659 Crores.

The scheme deems the transaction for HMVL as strategic fit but it may be better utilisation of surplus cash

India Education Services Private Limited (IESPL) incorporated in October 2011 is engaged in the business of providing all types of academic and non-academic services including providing all kinds of academic, technical, administrative, infrastructure and management support to students, corporate, universities, educational institutions and colleges.

Brief business details of both the Companies:

Hindustan Media Ventures Limited (HMVL) India Education Services Private Limited (IESPL)
Presently HMVL offer 4 brands they are:

1.Hindustan: It covers news across the entire spectrum of international, national and local news relating to politics, business, entertainment, sports and other general interests.

2.LiveHindustan.com: LiveHindustan.com is the recently launched Hindi News website, which promises far more than what Language sites are typically credited for.

3.Nandan: Nandan, HT Media’s monthly Children Magazine is more than 47 years old brand and it is extremely popular among children and their families in India and abroad.

4.Kadambini: A magazine for thought leaders giving them a fresh perspective on a variety of topics- literature, art, culture, health, technology, fashion, travel, beauty etc.

There are 2 distinct business lines:

1.Business to Consumer Segment (B2C):

  • This segment provides Higher Education Courses to the Retail Consumers
  • It is basically engaged in providing relatively long term higher education services courses to students/professionals etc., that range from 3 months to 1 year.
  •  B2C segment is a local consumption driven business.
  • This covers Studymate which is (high quality learning centers for classes IXth-XIIth in Delhi), in addition to the on-going initiatives such as HT Education (weekly education supplement) HT Campus (online platform for graduating high school and college students looking for higher education options) and HT Pace (initiative to bring the newspaper to schools).

2.Business to Business Segment (B2B):

  •  This segment provides Corporate Educational and Management training facilities to its corporate customers.
  • B2B segment services a global product portfolio.
  • This covers Bridge School of Management with two centres in Noida and Gurgaon, which has launched two new programs (a) 12-month Post Graduate Program in Management (PGPM) and (b) 8-month program in Predictive Business Analytics (PBA) in academic collaboration with Northwestern University School of Professional Studies. The programs have been well received by the students, as evidenced by good Net Promoter Score evaluation ratings on content, delivery and customer service.

Note: As per the financials as on 31st March 2016 of IESPL, the revenue from B2B business was 88% and B2C business was 12%

What is getting demerged to HMVL from IESPL? And why?

  • Over the period, IESPL has not been able to scale its B2C business and unleash its full potential for growth and profitability.
  • On the other hand, the HMVL has a deep presence in Tier II and Tier III cities of North India, which offers a large customer base with favourable demographics for the growth of the business of the B2C business of the Demerged Company.
  • Therefore, HMVL has proposed to acquire the B2C business of IESPL through demerger, to utilize its expertise and wide-spread reach of in North India to turnaround the B2C business of IESPL.

Structure

Hindustan-Media-Ventures-Demerger-Indian-Education-Services-1

Valuation

Appointed Date is 1st October 2017

Table 1: Valuation of HMVL and B2C Business of IESPL

Valuation Approach HMVL Demerged Undertaking of IESPL
Value per share(INR) Weight Value per share(INR) Weight
Underlying Asset* 166.04 0 -34.64 0
Income 317.95 1 41.67 1
Market 270.97 1 40.25 1
Relative Value per share 294.46   40.96
Entitlement Ratio (Rounded off)     7.2  

Shareholding Pattern

In consideration for this demerger HMVL will issue 10 Equity Shares of Rs 10 for every 72 Equity Shares of Rs 10 held in IESPL.

Hindustan Media Ventures Limited

Table 2: Shareholding Pattern Pre & Post Arrangement

Pre-Scheme of Arrangement Post scheme of Arrangement
Particulars Nos of Shares % Holding Consideration: HMVL to issue 10 Equity Shares of Rs 10 for every 72 Equity Shares of Rs 10 held in IESPL. Nos of Shares % Holding
HT Media Limited 54,533,458 74.30% 274,999 54,808,457 74.40%
Public 18,498,110 25.20% 2,779 18,500,889 25.11%
Shares held by employee trusts 362,202 0.49% 0 362,202 0.49%
Total 73,393,770 100% 277,778 73,671,548 100%

Observations

  • In July 2017, HT Media Limited acquired 49% stake of IESPL from Apollo Global Singapore Holdings Pte Limited for Rs 58 Crores.
  • The said transaction price has been considered under Price of Recent Transaction method, after adjusting for the net assets of remaining business of IESPL, to arrive at value of the Demerged Undertaking under market approach.
  • The value arrived under income approach is calculated based on outstanding number of equity shares of HMVL and Demerged undertaking of IESPL (post the proposed capital reduction).
  • The value of the demerged undertaking will be as follows:
Particulars Amount
Number of shares post capital reduction of IESPL 20,00,000 Shares
Fair value as per valuation report 40.96
Value of the B2C undertaking 8,19,20,000
  • India Education Services Private Limited (IESPL), was operating as a 50:50 Joint Venture between the Company and Apollo Global Singapore Holdings Pte. Ltd. (Apollo Global).
  • In 2017, in view of differences in the strategy of the JV Partners for future operations of IESPL, HT Media Ltd has acquired 49% equity share capital of IESPL, held by Apollo Global; and thus, the JV agreement stood terminated.
  • Accordingly, IESPL is a subsidiary of HT Media Ltd.
    It is interesting to note that HT Media Ltd decided to demerge the B2C business into HMVL instead of merging the whole IESPL into HMVL.

Tax Implication

The proposed demerger is in compliance of Section 2(19AA) of the Income Tax Act 1961 Therefore it will be tax neutral in the hands of the involved companies and their shareholders. It is interesting to note that HT Media Ltd decided to demerge the B2C business into HMVL instead of merging the whole IESPL into HMVL possibly because of the following reasons:

  • IESPL has carry forward losses of Rs. 124.62 Crores as on 30th September 2017, the conditions of Section 72A are not applicable to the merger of IESPL and HMVL, hence HMVL would not have been able to carry forward the losses of IESPL.
  • Hence HMVL opted for demerger instead of merger.
  • HMVL has lots of Foreign Portfolio Investors and Institutional Investors who might not be interested in loss making and capital intensive B2C business of IESPL.

Accounting Treatment

In the books of Demerged Company In the Books of Resulting Company
All the assets and liabilities of the demerged company being transferred shall be reduced at their book value as on appointed date (after taking into account the impact of capital reduction as proposed under “Scheme of share capital between the Demerged Company and its Shareholders) The Resulting Company shall, record the assets and liabilities of the Demerged Undertaking vested in it pursuant to this Scheme at the respective carrying amounts appearing in the books of the Demerged Company.
The difference between the book value of assets and liabilities of the Demerged Undertaking as on Appointed Date shall be transferred to retained earnings The Resulting Company shall credit its share capital account with the aggregate face value of the new equity shares issued by it to the equity shareholders of the Demerged Company pursuant to issue of shares on consideration.
The difference between the carrying amount of the assets and liabilities and the share capital credited with aggregate face value of the new equity shares as issued, shall be recorded as capital reserve.

Rights Issue

Following is the Rights Issue details of IESPL:

Particulars 2015 2016
HT Media Ltd 12,64,50,000 10,92,50,000
Apollo 12,64,50,000 10,92,50,000
Total Amount 25,29,00,000 21,85,00,000

IESPL used the rights issue money to run the operating expenses of the company, as it can be seen from its cash flow statements.

Conclusion

HMVL is a cash rich company and having free cash flow. HT MEDIA Ltd financed the exit of JV partner and now the responsibility is cast on HMVL to fund the B2C business. Though it is stated that for HMVL it is strategic fit and create value for its stakeholders, but considering its business how it will create value, for its stakeholders is not clear except may be better returns on surplus cash with the company. The promoters of HMVL have managed to increase their stake without spending a penny for a completely unrelated business, which also doesn’t seem to be strategically important for the company.

No Doubt HMVL will save tax on accumulated loss and further loss incurred till B2C business become profitable. As B2C business has become division of listed company, the company will not be able to invite partner in B2C business unless it demerges the said business in the new company. The purpose of keeping B2B education business as part of other group company and B2C as part of HMVL also is not clear. Instead of buying B2C business had HMVL invested in other securities its opportunity cost would be higher than the returns on B2C business. Hence this is a poor move done by HMVL.

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