Of shell status and distribution muscle

S. Vaidya Nathan

Binani Industries is another diversification story that has come unstuck almost completely.

Last week the process that began in 1999 was carried forward with the company deciding to spin off its core business of zinc into a separate company, Binani Zinc.

The company earlier spun off its cement and glass fibre businesses into subsidiaries. Now with zinc also gone, Binani Industries is effectively a shell company with investment holdings.

Binani Industries was the name given to the company when it moved from zinc to glass fibre and cement through a highly-priced equity offering in the mid-1990s. Now it has come a full circle, to Binani Zinc.

However, it is a tale of shareholders being bled of value. Existing Binani Zinc shareholders paid a high price in the mid-1990s as the company embarked on a fanciful diversification programme. A consolidation in the core business -- by way of capacity expansion that is now being talked off -- then would have led to a position of strength. But that is not the case.

New shareholders who came in through the public offering (significantly, the company did not make a rights offer) have only seen red. Now both sets of shareholders may well be placed in a position of further disadvantage.

In the two lines of business that have already being hived off as subsidiaries, the shareholders have no direct stake. The value status of the glass fibre business is not clear. But the cement business -- as a contemporary capacity -- may have very good value if sold (especially to MNCs) considering that the industry is in consolidation mode. If this happens, the shareholders may have little to rejoice about given the distribution of ownership claims. The same would be true of the glass fibre business.

However, shareholders are to be allotted one share of Binani Zinc for every five shares held in Binani Industries. Thus, they are effectively paying a stiff price once more for the equity mobilisation for the cement and glass fibre projects.

This seems to have played a role in the swap ratio and it is detrimental to the shareholders. In addition, a part of the price for the transfer is to be paid by way of equity issuance by Binani Zinc to Binani Industries. So, shareholders are not getting a complete and direct stake over the entire value of the zinc business.

The future prospects hinge on two aspects: First, the spin-off of the zinc business and a focussed approach towards adding capacity and/or acquiring Hindustan Zinc may help add value for shareholders. To the extent some focus is restored now, the move may be positive. It could indeed be the case if the group exits the cement and glass fibre businesses and uses the sale proceeds to consolidate its strength in zinc.

But it is here that the second aspect comes into play. The shareholders would now get shares in Binani Zinc. And even if they are allowed to retain their stake in Binani Industries (a shell company with investments), the stock may not trade at an attractive price. The possibility of the promoters taking the company private through an open offer cannot be ruled out. As Binani Industries would now hold a strategic stake in three businesses, this prospect cannot be ruled out.

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Even if this is not done, the desubsidiarisation risk still hangs over the companies vested with the cement and the glass fibre businesses. In that case, the shareholders would have no participation. These are key issues on which the company should set out its plan to the shareholders in a detailed manner. Only then would the exercise have the effect of creating some value for the battered shareholders.

Distribution strength

If Binani Zinc is a case of diversification gone awry for shareholders, Nicholas Piramal has been adding value through a series of acquisitions aimed at strengthening its distribution. The latest one is that of Rhone Poulenc at Rs 240 crore and at a price of Rs 875 per share from the Aventis group.

The Nicholas Piramal group has been aggressively pursuing growth through takeover and strategic alliances with MNCs. The company has leveraged its distribution and marketing strengths, which are attractive to an MNC seeking wider reach.

While this acquisition pushes Nicholas Piramal to the top of the table behind the Glaxo-SmithKline combine, the benefits of the acquisition may be felt only later. The price of Rs 240 crore appears stiff, especially as there may be no advantage gained by way of R&D.

All the indications suggest that the two companies may not be merged immediately. This may be positive since a quick merger may pose problems of integration. But what is of interest is the view expressed by the top management of Nicholas Piramal that there will be no impact on its standalone earnings as the acquisition is routed through a 100 per cent subsidiary.

At a time when consolidated could be the better way to go, this line appears rather simplistic. A wholesome picture regarding the plans for Rhone Poulenc over a period of time may help better price formation in the Nicholas Piramal stock.

But what is striking is that unlike numerous other companies in the country, Nicholas Piramal has been focussing on growth. It has shown that this works in the past and managed its acquisitions well. But a judgment on the Rhone Poulenc acquisition may have to wait for some time since a clear cost-benefit analysis may be possible only a few years hence.