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Govt expects Rs 32 billion from Maruti sale

BS Economy Bureau

The government has fixed a premium of Rs 3,180 per share of Maruti Udyog Ltd for a 4 per cent rights issue of Rs 4 billion. The issue will open Wednesday.

The three-stage selloff, cleared by the Cabinet Committee on Divestment on Tuesday, would enable the government to mop up at least Rs 24.24 billion, including a control premium of Rs 10 billion to be paid by Suzuki. This is based on a commitment by Suzuki to underwrite the government equity.

The government, however, expected to net Rs 32 billion, if the shares were sold at the rights issue price of Rs 3,280 per share, Divestment Minister Arun Shourie said.

The Rs 3,180 per share premium for the rights issue means Maruti has been valued at Rs 47.23 billion (nearly $1 billion).

The rights issue is for 1,219,512 shares with a face value of Rs 100 each or 4 per cent of the paid-up capital of the company. It will be followed by an initial public offering by the end of 2002-03 in which the government will offload 25 per cent of its equity or about 3.6 million shares. Suzuki has agreed to underwrite the IPO at Rs 2,300 per share.

The government will exit Maruti by March 2004 when it offloads the balance 2.9 million shares or 20 per cent equity in the market. Suzuki has committed to pick this up at Rs 2,000 per share, the book value.

"If the government is unable to sell any shares in the market, it will still get Rs 24.24 billion, Rs 2.66 billion above the fair value of Rs 21.58 billion.

This, however, includes the renunciation premium of Rs 10 billion," Shourie said. If the market buys the IPO at the rights issue price of Rs 3,280 per share, the government will realise about Rs 32 billion.

After the IPO, the government will retain two directors on the Maruti board. Suzuki will decide who will head the company after the change in the equity pattern.

"Managing director Jagdish Khattar will remain," divestment secretary Pradip Baijal said.

The agreement between the government and Suzuki will be revised within a month and the government will appoint an advisor for the IPO.

"The IPO will be through the book-building route for which the modalities will be worked out soon," Shourie said.

After the rights issue, the government's share in Maruti will be diluted to 45.54 per cent while Suzuki's will climb to 54.2 per cent. The price-earnings ratio, as per the deal, works out at 89.

"Most automobile sector companies are trading at less than their book values," Shourie said, justifying the deal.

The minister said the deal was "10 times better" than the 1992 agreement between the two partners when Suzuki increased its stake in the company from 40 per cent to 50 per cent.

The pricing formula in 1992 yielded just Rs 269 per share. Using that formula, the price per share will be Rs 11.53 billion, against the current transaction of a minimum Rs 3,684 per share, he added.

There was no concept of a control premium in the 1992 deal. Further, the government did not have the flexibility to decide what it wanted to do with its own shares.

Worse, an atmosphere of distrust had developed between the partners. The new agreement was able to put behind all that and the deal favoured both the partners, Shourie said.

The government opted for a three-stage exit from the company since it was felt that the market would not be able to absorb the entire government equity in one go. The agreement with Suzuki stipulates that no automobile major will be allowed to pick up a stake in Maruti till the government exits.

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