Modes of Business Reorganisation

October 2009

PricewaterhouseCoopers *connectedthinking

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Table of Content

• Restructuring – An Overview » Why Restructure » Methods of Restructuring » Important regulations • Newer Modes of Restructuring » Leveraged Buyouts » Delisting • Case Studies


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Restructuring – An Overview


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Why Restructure Tax Efficiency Unlock Value Family Arrangement Pre IPO Corporate Restructuring JV / Alliance Balance Sheet resizing Acquisitions Regulatory PricewaterhouseCoopers Slide 4 .

Methods of Restructuring Mergers Acquisitions Corporatization Spin off Others • Horizontal • Vertical • Conglomerate • Triangular • Acquisition of promoters stake • Open offer • Asset acquisition • Business acquisition • Part IX • Sale of business • Demerger of division • Slump Sale • Itemised Sale of Assets • Buy Back • Capital Reduction PricewaterhouseCoopers Slide 5 .

Important Regulations Stamp duty SEBI FDI Companies Act Exchange Control Indirect tax Accounting Implications Competition Act Tax regulations Multiple laws affect every M&A action PricewaterhouseCoopers Slide 6 .

Newer Modes of Restructuring PricewaterhouseCoopers Slide 7 .

there is usually a ratio of 70% debt to 30% equity • The purpose is to allow companies to make large acquisitions without having to commit a lot of capital. • • In LBO.Leveraged Buyouts • LBO is a strategy where a financial sponsor gains control of a majority of a target company’s equity through the use of borrowed money or debt. – In an LBO. assets of the acquired company act as collateral for the debt The exit strategy for the LBO is generally to break up and sell the acquired company or conglomerate or an IPO of the acquired company • Usually leveraged buyout firms look to achieve an IRR in excess of the WACC PricewaterhouseCoopers Slide 8 .

the securities of that company would no longer be traded on that stock exchange – Different from ‘Suspension” or “Withdrawal” of admission to dealings of the securities on the Exchange – Different from “buy-back” of securities in which securities of the company are extinguished with consequent reduction of capital of the company • Failure to comply with minimum public shareholding criteria shall attract Delisting Regulations Flexibility in decision making.Delisting • “Delisting” of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence. onerous corporate governance obligations may prompt companies to opt for delisting Need to comply with Reverse Book Building Process – Prone to influence by bulk shareholders / traders • • PricewaterhouseCoopers Slide 9 .

Case Studies PricewaterhouseCoopers Slide 10 .

Case Study 1 .Business Consolidation PricewaterhouseCoopers Slide 11 .

Case Study 1 Present Ultratech Shareholders Grasim Shareholders 35% Post Demerger Grasim Shareholders Ultratech Shareholders Grasim Others 55% Grasim Cement Others Cement 45% 100% 65% 55% 45% Ultratech Samruddhi Samruddhi Ultratech • • • • Scheme proposed to demerge the Cement division of Grasim into its WOS Samruddhi Samruddhi to issue 1 equity share for every equity shares held in Grasim Grasim’s stake to be diluted to 65% Samruddhi to be listed pursuant to demerger PricewaterhouseCoopers Slide 12 .

Samruddhi to be merged with UltraTech • Grasim to hold stake between 55% .65%.Case Study 1 Post Demerger Grasim Shareholders 35% Proposed Structure Ultratech Shareholders Grasim Shareholders Ultratech Shareholders Grasim Cement Others Grasim A% (55%<A<65%) 55% 45% B% (1-A-B)% 65% Ultratech Samruddhi Ultratech Merger • Post Demerger. post merger • Maintaining adequate control in UltraTech – Reason for a two stage consolidation • Stamp Duty payable twice – 1st on demerger and 2nd on merger PricewaterhouseCoopers Slide 13 .

Restructuring for Regulatory Compliance PricewaterhouseCoopers Slide 14 .Case Study 2 .

. Pre-restructuring Indian Promoters 24% Foreign Promoters 23% FII 31% Balance (including public) 22% Listed Co. transparency and capital inflow Slide 15 PricewaterhouseCoopers .Case Study 2 . . . Business cylos in List Co News business • • DTH business Cable business Entertainment business Only 26% total foreign equity shareholding allowed in News business Only 49% total foreign equity shareholding allowed in Cable business & Direct to home (DTH) business • As per MIB guidelines of uplinking for news channel – largest Indian shareholder should hold atleast 51% of the total equity capital of the broadcasting company Segregation of business for value unlocking.

. . . .Case Study 2 • News business of ListCo was demerged into SPV 1 .Entire Foreign Promoter holding in the news company transferred to Indian promoters . Possible to have a clear-cut leadership and direction for the growth Ease of entry for strategic investors Value unlock Shareholders • SPV 1 (News Business) SPV 2 (Cable Business) SPV 3 (DTH business) PricewaterhouseCoopers Slide 16 .Scheme provided that FIIs over certain % on the record date to be issued Preference Shares. part of the foreign promoter holding in the two resulting entities was transferred to Indian promoters to comply with regulatory guidelines Benefits Resulting shareholding • • Resulting structure FDI compliant. FII stake does not cross the prescribed FDI limits • Cable and DTH business of ListCo were demerged into two separate companies viz. SPV 2 and SPV 3 respectively • As in the case of News Business. to ensure.

Case Study 3 .International Listing PricewaterhouseCoopers Slide 17 .

was set up as a WOS of UTV India UTV India 76% UTV India.Case Study 3 • UTV Mauritius. for engaging in exploitation of overseas rights • Subsequently. UTV Mauritius acquired the 100% >1% UTV Motion Pictures (IOM) 24% AIM Investors movie portfolio (library of existing movies) of UTV India and ventured into coproduction of movies – Funding requirement for the expansion ~100% UTV Mauritius UTV Mauritius Movie Production and rights exploitation • UTV India incorporated a company in Isle of Man (‘IOM’) and diluted its stake for AIM listing • UTV Motion Pictures infused funds in UTV Mauritius PricewaterhouseCoopers Slide 18 .

Case Study 4 .LBO PricewaterhouseCoopers Slide 19 .

• Following loan facilities were used for financing the acquisition: – Bridge Facility.12 bn constituting 68% of the total acquisition value of USD 12 bn. Revolving credit facility.12 bn from consortium of banks Debt 100% UK Co 2 100% Debt • SPV’s were floated in UK under the name Tata Steel UK. Tata Steel India Equity of $3.Case Study 4 . . UK Co 3 100% Tata Steel UK Debt Corus ---.88 bn • Combined entity to become 5th largest producer of steel from 56th • Would have taken several years for Tatas to build an enterprise of a size of Corus Debt 100% Singapore Co 100% • Acquisition to provide significant presence in Europe Methodology UK Co 1 Acquired Corus out of $3. Term Loan. Monies raised by way of debt was pushed in each subsequent subsidiary and ultimately in Corus. .3) which were ultimately held by a Singapore SPV • Tata Steel alongwith the SPV’s incorporated in Singapore and UK raised the requisite debt of USD 8.88 bn & long term debt of $8.2. Tulip Holdings (1. .To be merged with Corus PricewaterhouseCoopers Slide 20 .

Case Study 4 • Tata Steel acquired CORUS plc. tax shield on interest available to Corus • Debt-equity ratio of funding is 68:32 • Possible merger of Tata Steel UK with Corus PricewaterhouseCoopers Slide 21 .88 bn & – Borrowings of $8. . for $12 bn – Equity Contribution of $ 3. .12 bn through subsidiaries • Tax consolidation in UK.. .

Case Study 5 .Off shoring of business PricewaterhouseCoopers Slide 22 .

(BILT) 100% 100% BILT Graphic Paper Products Ltd.8% Sabah A B Issue of Equity Shares of Rs. 1500crs of BGPL • Scheme also provided for buy back of 40% of B the post-split equity shares of BILT .Option to shareholders holding 1.Funds received from BPH to be utilised for The restructuring prepares BPH and BIH for future listing in the international market retirement of debts and to fund buyback of its shares PricewaterhouseCoopers Slide 23 .Case Study 5 Ballarpur Industries Ltd.000 equity 97.1500 crs Transfer of equity shares and debentures of BGPL to BPH for cash consideration shares or less to sell their entire holdings in List Co • BILT transferred the shares and debentures received above to BPH . (BGPL) • BILT is listed on BSE and NSE and is engaged in manufacture and sale of paper • Pursuant to a Scheme of arrangement and A Ballarpur International Holdings. 450crs and debentures of Rs.V.450 crs and Non-Convertible Debentures of Rs.V. B. (‘BPH’) reorganization. (Netherlands) 100% Ballarpur Paper Holdings B. 3 undertakings of BILT were transferred to BGPL in exchange of equity shares of Rs.

Right Sizing Balance Sheet /Utilisation of SPA PricewaterhouseCoopers Slide 24 .Case Study 6 .

. . . Determinants Issues Accounting losses in the Balance sheet Diminution in value of assets / intangible assets Deficit created pursuant to mergers/ demergers Affects capital market perception Inability to pay dividend despite profits Hit to the Profit & loss account Solution Effects: • Adjust the asset/ deficit against Securities Premium account/ other reserves • Achieves rightsizing of the Balance sheet • No negative impact on financial ratios (except diminution in value of assets) • Improves capital market perception • Check MAT implications PricewaterhouseCoopers Slide 25 .Case Study 6 .

. ..Aforesaid restructuring carried out under Scheme of Arrangement under Section 391 read with Sections 78.Proposal to create an “International Business Development Reserve” (‘IBD Reserve’) by appropriating Rs.Scheme approved unanimously by all the Equity Shareholders and sanctioned by the Gujarat High Court PricewaterhouseCoopers Slide 26 . Case Study 6 • Scheme of Arrangement between Sintex Industries Limited and its Equity Shareholders . 2008 » Reserve so created to be utilised by the Company towards the acquisition expenses . 100 to 103 of the Cos Act . .The Company has been making acquisitions and strategic partnerships in India as well as overseas. . 200 crs from its SPA as on March 31.

Case Study 7 .Back Door Delisting / Privatization of Business PricewaterhouseCoopers Slide 27 .

KPL is listed on BSE.NoC to Scheme from the Stock Exchanges Pan Parag India Limited (PPIL) and approval by majority of shareholders .Case Study 7A – Kothari Products • Shareholders KPL carries out real estate and tobacco business Scheme of Arrangement between KPL and PPIL .Scheme sanctioned by the Allahabad High Court . Beverages Division & Trading Division from KPL to PPIL.Discharge of consideration by issue of Non- cumulative Redeemable Non-convertible Preference Shares .Scheme provided for demerger of Tobacco • Kothari Products Limited (KPL) Real Estate Division. . NSE Demerger of Tobacco business Tobacco .May be construed as back door delisting Objective was to separate tobacco business due to risk associated and ease the fund raising in real estate PricewaterhouseCoopers Slide 28 .

Shareholders to have option to return the cheque along with a letter exercising the option to continue as shareholder within 60 days of receipt of the cheque PricewaterhouseCoopers Slide 29 .retain shares in the unlisted Resulting Entity. NSE Scheme of Arrangement providing for merger of two WOS into Macmillan and demerger of Publishing Business into Macmillan Publishers. or .Case Study 7B – Macmillan • • Macmillan is listed on BSE. a company floated by promoters • Scheme provided that the Macmillan Publishers will not be listed on any Stock Exchange pursuant to the Scheme • Consideration for Demerger discharged in the form of issue of Equity Shares of Macmillan Publishers to shareholders of Macmillan in accordance with the exchange ratio • Exit opportunity was provided to all the shareholders except promoters to .offer to sell the shares in the unlisted Resulting Entity to promoters.If no option exercised within 3 months from the Record Date –deemed such members have chosen to transfer shares of Macmillan Publishers to promoters . .

Case Study 7C – English Indian Clays • English Indian Clays (‘EIC’) engaged in business of clay mining & refining and manufacture of starch and allied products Shareholders * • Objective was to delink the investment division and to squeeze out the minority shareholders therein Invstmt Unit English Indian Clays • As a part of restructuring. till 1 year from the record date PricewaterhouseCoopers Slide 30 . – 8% CRPS. 1000 each. options to shareholders: – BPL to issue 4 Equity Shares for 19 shares in E Ltd. investment division was demerged to Bharat Starch.Option to shareholders to sell equity shares to promoters at the rate of Rs. tenure 10 years Bharat Starch (Unlisted) * Various Options to Shareholders . – Option to receive 400 CRPS for 19 Equity shares in E Ltd.Shares issued pursuant to demerger would not be listed .

Family Arrangement PricewaterhouseCoopers Slide 31 .Case Study 8 .

Reliance Infocomm.. • • Reliance.Case Study 8 . Each of these subsidiaries issued its shares to the shareholders of RIL in the ratio of 1:1 Reliance Industries Ltd Shareholders Reliance Industries Ltd Coal based energy Undertaking ASSETS • Fixed assets • Shares in REL. Hirma Power Pvt Ltd. Textiles and other business Reliance Energy Ventures Ltd (‘REVL’) Reliance Natural Resources Ltd (formerly Global Fuel Management Services Ltd. World Tel holding Ltd. Preference shares of Reliance Telecomm • Loans and Advances LIABILITIES • Related Loans PERSONNEL Remaining Undertaking • Petrochemicals. . • Loans and Advances LIABILITIES • Related Loans PERSONNEL PERSONNEL Financial Services Undertaking ASSETS • Fixed Assets • Shares in RCL. the business of Reliance was segregated into five undertakings which were hived off into four subsidiaries. amongst the most pioneer groups of India As a part of family arrangement. Jayamkondam Power Pvt Ltd. Reliance Life Insurance • Loans and advances LIABILITIES • Related Loans Telecom Undertaking ASSETS • Fixed assets • Receivables for capital leases • Shares in RCIL. Oil & Gas. Reliance General Insurance. . . • Loans and Advances LIABILITIES • Related Loans PERSONNEL Gas based energy Undertaking ASSETS • Fixed assets • Shares in Reliance Patalganga Power Ltd. RPL. Reliance Telecom. Reliance Thermal Energy Pvt Ltd etc.) Reliance Capital Ventures Ltd (‘RCVL’) Reliance Communications Ventures Ltd PricewaterhouseCoopers 32 Slide 32 .

Appointed Date= Effective Date • Benefits of the restructuring .Investment opportunities to investors for different segments PricewaterhouseCoopers Slide 33 . 10 each were issued to the shareholders of RCVL for every 100 equity shares of the face value of Rs. .5 equity shares of face value of Rs..7. 10 each were issued to the shareholders of REVL for every 100 equity shares of the face value of Rs. .Appointed Date = Effective Date • REVL merged with REL .5 equity shares of face value of Rs. 10 each . 10 each .Segregation of business thereby providing settlement between family members . .Value unlock . Case Study 8 • RCVL was subsequently merged with Reliance Capital Ltd (RCL) .

Business Acquisition PricewaterhouseCoopers Slide 34 .Case Study 9 .

Case Study 9 .278 crores e) Grasim sells its 15% stake in L&T to the Trust for Rs 446 crs – Trust funded by L&T PricewaterhouseCoopers Slide 35 . (e) (d) Grasim 15% Other 68% (b) Shareholders 85% 12% (b) L&T Employees Trust (c) 20% (b) L&T (a) Engineering Cement Ultra Tech Cemco Ltd. 362 crs d) Grasim makes an open offer to acquire 30% in Cemco – total outflow for Grasim . Grasim ultimate ’s shareholding – 51% Issue of Shares Transfer of shares Shareholding a) Demerger of Cement business into UltraTech Cemco b) Issue of shares by Cemco – 80% (68% + 12%) to L&T shareholders and 20% to L&T c) Grasim acquires another 8. . .5% stake in Cemco from L&T for Rs.Rs. . CemcoLtd. 1.

00% 85.5% 51.Restructuring Shareholding in L&T Post Demerger Shareholding in L&T 15. Case Study 9 Particulars L&T Grasim Other Shareholders Pre .00% • • • Demerger scheme compliant with tax provisions Grasim with 51% shareholding acquires control of Cemco L&T management gets control of 15% (held through the Trust) stake previously held by Grasim PricewaterhouseCoopers Slide 36 .4% 15. .00% in Ultratech 20% 12. .6% 67.1% 37..4% Post Restructuring shareholding in Ultratech 11. .00% 85.

Case Study 10 .Cross Border Merger PricewaterhouseCoopers Slide 37 .

NSE.Case Study 10 • of e s su Is are sh Shareholders • Scandent is a company listed on BSE. Madras Stock Exchange and Ahmedabad Stock Exchange and is engaged in IT sector Cambridge was a Delaware based holding / investment company which held investment in operating companies engaged in IT / ITES in US and other jurisdictions Scandent wanted to acquire Cambridge and hence as a part of restructuring Cambridge was merged with Scandent - Scandent • Cambridge r ge er M PricewaterhouseCoopers Merger of Delaware company with Indian company permitted as per Delaware laws and Indian laws Scandent issued shares to the shareholders of Cambridge as consideration for merger - Objective was to acquire Cambridge without any cash outflow Slide 38 .

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