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Landmark corporate restructuring

The board of directors of Indian Rayon and Industries Limited (Indian Rayon), Indo Gulf Fertilisers Limited (Indo Gulf) and Birla Global Finance Limited (Birla Global), in their respective meetings on 11 September 2005, approved the restructuring proposal for the mergers of Indo Gulf and Birla Global with Indian Rayon. The schemes of arrangement, valuation reports and share entitlement ratios were also approved by the respective boards at the meetings. This landmark restructuring, valued at over Rs. 5,000 crore, is one of the major consolidations of its kind in India.

Says Mr. Kumar Mangalam Birla, Chairman, Aditya Birla Group, "This restructuring is an important step in shareholder value creation. It creates a company that captures opportunities in the evolving Indian economy through leadership in focussed value businesses i.e., carbon black, VFY, textiles and fertilisers, and driving high growth businesses viz., garments, IT / ITES, financial services and telecom."

Placing this in the context of similar value unlocking initiatives by the group in the past, Mr. Birla added, "Through consolidation of metals three years ago, we created value for shareholders together with market out-performance. We aim to achieve the same through this transaction."

The restructuring schemes
Under two separate restructuring schemes, Indian Rayon will issue to Indo Gulf shareholders 1 equity share of Indian Rayon for every 3 equity shares of Indo Gulf held. Indian Rayon will also issue to Birla Global Finance shareholders 1 equity share of Indian Rayon for every 3 equity shares of Birla Global Finance held. The swap ratio is expected to translate into a reasonable premium to both Indo Gulf and Birla Global Finance shareholders, based on the current Indian Rayon share price.

The share exchange ratios were based on valuations done by two firms viz., Bansi S. Mehta & Co, and Deloitte Haskins & Sells, and were determined in accordance with the best practices in valuation.

In line with the approval of the board at the same meeting, Indian Rayon proposes to rename the company as "Aditya Birla Nuvo", subject to approval of its shareholders. The new name mirrors the transformed character of the company.

The restructuring plans
Mr. Birla said that the Indian economy is unleashing immense opportunities for growth and leadership in both the new age businesses as well as real economy businesses. In his words, "Even though the fertilisers business has seen steady profits, regulatory uncertainties constrain growth avenues, making accelerated value creation difficult. Becoming a part of the Indian Rayon shareholder fraternity should provide Indo Gulf shareholders a broader canvas to participate in enhanced value creation.

For the Birla Global shareholders, they extend their participation in financial services beyond mutual funds into life insurance, as the financial services business of the group gets consolidated under Indian Rayon." He averred that, "This transaction will strengthen the financials of Indian Rayon, and open new opportunities, and should result in enhanced investor interest. The company has a demonstrable record of managing a diverse portfolio with razor sharp focus in each business."

Mr. Sanjeev Aga, Managing Director, Indian Rayon stated, "This is a major step in taking forward the well-crafted strategy of leveraging value businesses for accelerated growth. Post-consolidation, Indian Rayon becomes a more sizeable play, with a diversified, high growth business engine."

Said Mr. S. K. Mitra, Managing Director, Birla Global Finance, "Birla Global is a well-established player in the consumer/ investor financing space and has seeded the group's successful foray into financial services. I am sure our shareholders would be delighted to be a part of Indian Rayon and to reap the benefits of their extended participation into life insurance, and in fact into the fast growing businesses of Indian Rayon."

Remarks Dr. Rakesh Jain, Managing Director, Indo Gulf and the Business Head for the group's global carbon black business, "Even though Indo Gulf has been profitable, growth avenues were limited for us. This restructuring adds value-accretive application of fertilisers' cash flow and value creation for our shareholders."



Building a platform for value enhancing growth

Post restructuring, Indian Rayon will emerge as one of the large private sector companies in India. The company's consolidated accounts as on 31 March 2005, when restated with the results of the two merging companies are as under:

  • Sales in excess of Rs. 3,980 crore (US$ 900 million), an increase of 25 per cent
  • Net profit in excess of Rs.150 crore (US$ 34 million), an increase of 150 per cent
  • Net worth in excess of Rs.1,825 crore (US$ 415 million), an increase of 60 per cent

The transactions are expected to be beneficial to shareholders of all the three companies viz. Indian Rayon, Indo Gulf and Birla Global Finance, and would provide EPS accretion for Indian Rayon shareholders. Indian Rayon would benefit from cash flows of fertilisers business that would spur growth across its businesses. The total number of shareholders would be in excess of 1,75,000 in the consolidated entity.

Management
Mr. Sanjeev Aga, currently Managing Director of Indian Rayon, will be the Managing Director of Aditya Birla Nuvo. The board of directors of this company will include Mr. S.K.Mitra, currently Managing Director, Birla Global Finance; Dr. Rakesh Jain, currently Managing Director, Indo Gulf; Mr. K.K. Maheshwari, Group Executive President, responsible for chemical business globally and Mr. Adesh Gupta, presently CFO of Indian Rayon.

Post merger, Dr. Jain will continue to lead the carbon black business of the group globally and report to the chairman of the board .The existing Indo Gulf fertiliser unit at Jagdishpur (U.P.), post the amalgamation will directly report to Mr. Aga. The financial services business, led by Mr. Mitra will continue to report to the chairman of the board directly.

Advisors to the restructuring
Amarchand Mangaldas and Suresh Shroff and company, one of India's leading law firms, acted as legal advisors. The valuers to the transaction were Deloitte Haskins & Sells and Bansi S. Mehta & Co.

The proposed restructuring schemes will be filed with the respective stock exchanges as per the listing agreement and then, in the High Court of Judicature at Mumbai, the High Court in Uttar Pradesh and the High Court in Gujarat. The restructuring is subject to various approvals, including regulatory authorities, shareholders, lenders, and creditors. The schemes when sanctioned by the respective High Courts will take effect from 1 September 2005, the appointed date.

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