What is company Merger and how to trade on such stocks?
Updated on 21 Sept 2016
There have been a number of merger and acquisition announcements in recent times, some of which have sent the stocks crashing. Be it the announcement of a merger between Reliance Communications and Aircel or amalgamation between Ashok Leyland and Hinduja Foundries or Grasim and AB Nuvo, Vedanta and Cairn and SBI and its associate banks, consolidation has suddenly become the running theme in India's corporate world. In many cases, merger news has turned minority shareholders jittery. The stock market has given a thumbs-down to such deals, sending the stocks crashing. Shares of Hinduja Foundries slumped 18 per cent on Friday on the back of a 20 per cent fall on Thursday after its board announced merger with group firm Ashok Leyland. Investors punished Aditya Birla Nuvo and Grasim Industries last month when the two companies announced a merger, with brokerages such as HSBC suggesting downside risks to the Grasim stock, given the lack of material synergies and exposure to non-core businesses that the company will undertake after the merger.
Overall, while some announcements seemed to have been made to take advantage of backward or forward integration of two group companies, others were deemed unwanted as they meant clubbing of diverse businesses under one umbrella. Consolidation has happened even within industries, with weaker players such as Reliance Communications and Aircel going for a merger to take on bigger peers such as Bharti Airtel.
On Hinduja Foundaries merger, the Ashok Leyland management said it was expecting its EPS to increase gradual in three years. The firm has reported losses for the past 2-3 years. In the near term, there could be some pressure on earnings and balance sheet (for Ashok Leyland), but over FY16-18 we expect 30 per cent EPS CAGR, strong FCF and RoE to improve to 25 per cent (from 18 per cent in FY16) As for the RCom-Aircel deal, it would help RCom secure 800MHz band in eight circles with extended validity till 2033. The merged entity will hold 448MHz spectrum, which is about 17 per cent of the total spectrum. However, Aircel is highly-leveraged and has presence in low Arpu-generating circles. Arpu is average revenue per user. Rating agency Moody's has already placed Reliance Communications' Ba3 ratings under review for a downgrade.