The board of directors of BSE-NSE Listed Diversified conglomerates Mr. Gautam Adani leads Adani Group announced a wide-ranging restructuring to streamline its various businesses and unlock their potential. The $9.4-billion Group said its holding company, Adani Enterprises Ltd ‘AEL’, will demerge its port, power, and transmission undertakings but absorb its wholly-owned mining subsidiary.
The composite scheme of arrangement for the demerger of Adani Enterprises’ port undertaking into Adani Ports and Special Economic Zone Limited ‘APSEZL’ and that of power undertaking into Adani Power Limited ‘APL’ also involves demerger of the flagship’s transmission undertaking into Adani Transmissions Ltd ‘ATL’, a wholly-owned subsidiary of Adani Enterprises, and its subsequent listing.
Adani Group’s restructuring is largely in line with a corporate trend in which large corporations are realigning their businesses to unlock latent shareholder value. In the past, Larsen and Toubro Ltd, Grasim Industries Ltd and Vedanta Plc have carried out similar restructuring exercises. Most recently, Max India Ltd said it will split into three separate units—life insurance; health and allied businesses; and manufacturing.
Adani owns and operates six ports and terminals including India’s largest commercial port ‘Mundra’. The company on consolidated basis handled 108 MMT cargo in 9M FY15. Adani group is also largest thermal power producer in India with installed capacity of 9240 MW. Power projects are spread out across the states of Gujrat, Maharashtra, and Rajasthan.
Many times operating few business verticals under one umbrella makes it difficult for each of the businesses to perform to full potential especially when the business verticals are significantly different in terms of their business models. There arises need to spread overall risk by not keeping all your eggs in the same basket. Adani group has a presence in multiple businesses, it was inevitable that it should spin off various units to sharpen its focus. This will help Adani group to drive next level of value creation, competency, decision making and would be able to accelerate the business growth.
The demerger is a win-win situation for shareholders, as it generally leads to an increase in a valuation of the separate business entity. Shareholders enjoy the ownership of both Demerged as well as Resulting Company. The Adani’s scheme of arrangement will simplify the corporate structure providing shareholders of Adani Enterprises direct shareholding in the respective operating companies, listing of one of the largest private sector transmission companies (Adani Transmissions) with over 5,000 circuit km of transmission lines across western, northern and central India and increase free float at Adani Power and APSEZL. Thus Post-restructuring, shareholders will be having the flexibility to sell out or stay put, based on the performance of the companies.
From a promoter perspective, this restructuring will help to increase the valuations of the holding company and respective demerged companies. For instance, the port business with Adani Enterprises would not fetch a better valuation compared to a situation when it is with ‘Adani Ports’. The current move will clean up the structure and derive the maximum valuation for all units.
Many times a small but profitable business with high margins will be overloaded with corporate overheads when large, low margins businesses will be the reason for those high overheads in the first place. This sends overall results plummeting from high to average or below for the company as a whole. The same thing is happening with Adani Enterprises. If we breakdown the revenue of Q3FY 15 by segment, around 32% of overall revenue was from Power segment and 6% was from Port segment. However, if we breakdown EBIT for the same period by segment around 47% was contributed by Power segment and 27% was contributed by Port Segment. This shows port business may not be contributing much to the top line of AEL but it is contributing significantly to the bottom line. Hence demerger will facilitate each business to independently pursue their growth plans by having dedicated management team focus on the single business vertical.
If we look at the global trends, it also shows a lot of corporations are going for the demerger. Recently Yahoo decided to spin off its 15.4% stake in Chinese retail giant ‘Alibaba’ into a newly-formed independent registered investment company called SpinCo. Last year in October IT giant IBM announced to hive off its loss-making microelectronics unit to a chipmaker Globalfoundries Inc. this move was to free up capital and to reallocate it to other areas and to reduce its presence in the hardware industry to focus on its Software business.
Demergers are gaining momentum in the Indian Market. There has been a spate of demerger announcement in the past months by Indian Companies. In our in-house monthly magazine “M&A Critique” we have thoroughly covered various demerger’s happened in India during last few years. This month also we have given the analysis of Max India’s demerger.
India still has many ‘Big Fish’ group’s which operates many businesses under a single umbrella such as Mr. Mukesh Ambani lead Reliance group, Mr. Sunil Mittal lead Bharati Group, ITC and Mr. Kumar Mangalam Birla’s Aditya Birla Nuvo. In 2015 we can expect some big groups going for demerger to enhance the stakeholder’s value.
Main Contributions : Anirudha Jinturkar.
