Companies, it seems, can change their minds as quickly as investors.
Consider tech major Wipro. After sinking over Rs 2,300 crore of capital into its consumer and lighting business to build it up to a Rs 3,300 crore size, it has now decided that its IT and consumer businesses would be better off if they were separate.
WHY DELIST?
The non-IT business will now be de-merged and renamed Wipro Enterprises while the IT company would remain plain-vanilla Wipro.
Now, Wipro’s consumer arm bought out Yardley’s European and UK operations as recently as July 2012.
If it thought it worthwhile to sew up a consumer goods acquisition barely six months ago, why does it now think that investors would be better off without it? And why should the consumer business be unlisted, effectively forcing out public investors? No answers have been provided.
COMPLEX DEAL
But then, the terms of the de-merger are complex enough to keep shareholders busy for a while. The non-IT businesses of Wipro now bring in about 13 per cent of its annual sales and 6 per cent of operating profits.
To compensate shareholders for the dent to the finances from their hive-off, the company has offered them two choices — for every five Wipro shares they now hold, they can opt to receive one equity share in the new Wipro Enterprises. Or they can choose to get a 7 per cent preference share in Wipro Enterprises redeemable after one year at Rs 235.2.
Now, the first option would leave investors with illiquid stock in an unlisted company. So the promoters have offered to swap each Wipro Enterprises share for 0.6061 shares they hold in Wipro itself.
Unravelling this tangled scheme reveals what Wipro investors will get in lieu of the de-merger. If they choose preference shares, they will get roughly Rs 47.7 after one year for each Wipro share. At today’s prices, this is roughly Rs 43.4 per share. Investors thus get 12.1 per cent compensation for letting go of the non-IT business.
If they opt for equity in Wipro Enterprise and swap it with the promoters, they would again make a gain of about 12.1 per cent on the transaction.
GENEROUS VALUATION
Now, rough calculations based on the above show that Wipro is valuing its non-IT businesses at about Rs 10,900 crore.
This translates into a price-earnings multiple of about 29-30 times the net profit for this business. That seems a generous valuation. It makes sure that investors are getting a good price for their exit from this business at a time when consumer stocks enjoy high market fancy.
But given that Wipro consumer business today generates much lower returns on capital (19 per cent) than IT (45 per cent), the listed entity may benefit from a re-rating too.
That Wipro is not short-changing its investors on valuations while implementing this de-merger appears clear. But why has it structured it in such a complicated way?
WIN-WIN
Well, by playing this game of round-robin with investors, Wipro promoters have ensured two things.
One, if investors choose to take the share swap route, promoters get to reduce their own holdings in the listed IT company. This helps them meet the government’s minimum public shareholding norms, without selling in the market. In fact, they get to exit Wipro shares at a valuation that they approve! But what if investors go for the preference shares instead of equity? Well, in that case, Wipro Enterprises will still get access to preference capital at the cost of 7 per cent for a year. More investors opting for preference shares will also mean a smaller equity base, boosting earnings per share for Wipro Enterprises.
That is good news for the promoters too, as at the end of this deal they will be holding the bulk, if not all, of the equity in Wipro Enterprises.
Talk of a win-win situation!
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