NEW DELHI: There have been a number of merger and acquisition announcements in recent times, some of which have sent the stocks crashing.
Be it the announcement of a merger between Reliance Communications and Aircel or amalgamation between Ashok LeylandBSE -0.74 % and Hinduja FoundriesBSE -18.75 % or Grasim and AB Nuvo, Vedanta and Cairn and SBI and its associate banks, consolidation has suddenly become the running theme in India’s corporate world.
In many cases, merger news has turned minority shareholders jittery. The stock market has given a thumbs-down to such deals, sending the stocks crashing. Analysts said one should not hit the panic button and see if the proposal is EPS-accretive for the merged entity.
Shares of Hinduja Foundries slumped 18 per cent on Friday on the back of a 20 percent fall on Thursday after its board announced a merger with group firm Ashok Leyland.
It was nothing new.
Investors punished Aditya Birla Nuvo and Grasim Industries last month when the two companies announced a merger, with brokerages such as HSBC suggesting downside risks to the Grasim stock, given the lack of material synergies and exposure to non-core businesses that the company will undertake after the merger.
Overall, while some announcements seemed to have been made to take advantage of backward or forward integration of two group companies, others were deemed unwanted as they meant clubbing of diverse businesses under one umbrella.
Consolidation has happened even within industries, with weaker players such as Reliance Communications and Aircel going for a merger to take on bigger peers such as Bharti Airtel.
“Merits of each merger or demerger should be evaluated on a case-to-case basis,” Dharmesh Kant, Head of Retail Research, MOSL, told ETMarkets.com.
“One has to closely study the guidance given by the management on how they intend to carry forward the business and what are the benefits they aim to derive therefrom. Even if the merger is not intended for forward or backward integration, investors can continue to remain invested if the proposition is EPS-accretive for the merged entity,” Kant said.
On Hinduja Foundaries merger, the Ashok Leyland management said it was expecting it to be EPS-accretive in three years. The firm has reported losses for the past 2-3 years.
“In the near term, there could be some pressure on earnings and balance sheet (for Ashok Leyland), but over FY16-18 we expect 30 percent EPS CAGR, strong FCF, and RoE to improve to 25 per cent (from 18 per cent in FY16). We expect the momentum of market share gains to sustain, though at a slower pace. Post the recent correction, valuations have become reasonable,” Edelweiss Securities said in a note.
As for the RCom-Aircel deal, it would help RCom secure 800MHz band in eight circles with extended validity till 2033. The merged entity will hold 448MHz spectrum, which is about 17 percent of the total spectrum.
However, Aircel is highly-leveraged and has a presence in low ARPU-generating circles. ARPU is average revenue per user.
“With no residual operations, what will happen to Aircel’s remaining debt is yet to be seen. We believe the merged company will be most levered telecom firm with limited ability to invest. Primary synergies are likely to come from opex rationalisation,” Credit Suisse said in a note.
Rating agency Moody’s has already placed Reliance Communications’ Ba3 ratings under review for a downgrade.
Technical view
Birendrakumar Singh, AVP – Technical Research at Systematix Shares & Stocks said that the merger of SBI, Cairn and Vedanta have been positive , as this merger took placed at a time when the market trend had started gaining momentum from panic sell off.
“And the said stocks were extremely oversold and had turned positive just before the announcement of this merger. Similarly, Ashok Leyland is placed in the oversold region, as it reacted from Rs 112. Crucial support for Ashok Leyland is placed at Rs 77. On a strong move above Rs 90, the uptrend would start gaining momentum. Hence, maintain long position with a stop loss of Rs 77. In the case of a weak close below Rs 77, then the intermediate trend would be negative,” Gopalan said.
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Source: Economic Times
