Srei Infrastructure Finance last month sold 50 per cent stake in a part of its business equipment financing arm to France's largest bank BNP Paribas for Rs 775 crore (Rs 7.75 billion). This means Srei valued its main money spinner, the equipment financing business, at Rs 1,500 crore (Rs 15 billion) - two-and-a-half times the entire company's market capitalisation of Rs 600 crore (Rs 6 billion) before the deal was signed.
The announcement started showing results immediately. In the next three trading sessions, Srei stock rose by 50 per cent, the maximum permissible limit, from Rs 60. Srei isn't alone.
A series of companies including Bajaj Auto, Aditya Birla Nuvo (formed by merging three companies - Indian Rayon, Birla Global Finance and Indo Gulf Fertilisers) - and Indiabulls are taking recourse to financial restructuring to unlock shareholder value.
ICICI Bank, for example, has proposed to transfer its holdings in the insurance and mutual fund business to a separate company, ICICI Holdings. The company is diluting 5.6 per cent stake for Rs 2,500 crore (Rs 25 billion), putting its total valuation at Rs 44,000 crore (RS 440 billion). This is expected to push up the ICICI Group's total valuation.
Rajeev Suneja, vice-president, Kotak Investment Banking, whose bank was the advisor to Srei for the transaction, told Business Standard that this is a classic case of enhancing shareholders' value by unlocking the hidden wealth.
Here's how. Srei will get Rs 775 crore (Rs 7.75 billion) for transferring the equipment financing business into a new company, in which BNP will acquire a 50 per cent stake.
This amount will be pumped into Srei's other business activity, project financing. "We have been growing at over 30 per cent annually over the last few years. Srei now needs money to finance its expansion. We find the deal interesting as it gives us money without diluting our business interest or stake," said a Srei official.
Why is restructuring getting popular? Said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services: "Investors, particularly foreign, find it easy to evaluate a company against its peers in the domestic and the overseas markets if the firm is engaged in one vertical."
Analysts are confused in judging a cement company's performance against its peers if the firm earns a chunk of its business from textiles, he added. According to him, restructuring provides an opportunity to diversified companies to shed the baggage of their legacy in some non-related line of businesses.
The equity head of a foreign bank, who did not wish to be quoted, said financial restructuring would gather momentum as long as foreign institutions keep discovering the potential of Indian companies.
Consolidation afoot
- A series of companies including Bajaj Auto, Aditya Birla Nuvo and Indiabulls are taking recourse to financial restructuring to unlock shareholder value
- ICICI Bank is diluting 5.6 per cent stake in ICICI Holdings for Rs 2,500 crore, putting the latter's total valuation at Rs 44,000 crore.
- Srei will get Rs 775 crore for transferring the equipment financing business into a new company, in which BNP will acquire a 50 per cent stake
