RPG defends merger of 4 arms into unlisted entity

The RPG Group recently decided to merge four listed companies — Summit Securities, Brabourne Enterprises, Octav Investments and CHI Investments —  with RPG Itochu, a 100% subsidiary of RPG Enterprises.

The purpose of the merger, besides consolidating assets of the companies into one large listed entity, is to achieve cost optimisation as well as better governance, the company said.

“A multitude of listed companies is not an efficient system. The merged entity will command better valuations than the sum of the individual companies, since it will have a far higher shareholding in specific operating and manufacturing companies,” a company spokesperson told DNA Money.

The four merging companies are together worth under Rs 1,000 crore.

The basis of the merger is the valuation of each of the companies involved in the merger. The valuation has been done by Grant Thornton, based on the actual value of each company’s underlying assets as well as taking into account the market value of the shares.
“The four listed companies are, accordingly, valued on the basis of the actual value of their underlying assets and not on the basis of the market price alone,” said the RPG spokesperson.

Some market sources feel the merger is being done on a “50:50 basis,” wherein RPG Itochu would have 50% of the value and the other 50% would be split among the four listed companies.

They also see minority shareholders suffering a loss of wealth of Rs 600 crore in the process as the four listed companies are quoting at a huge 85% discount to asset value.
However, the company spokesperson clarified that the unlisted RPG Itochu has a value that is 85% of the combined value of all these four listed companies.

“The merger exchange ratio is determined based on the independent valuation by one of the most reputed international firms, Grant Thornton. They have used the Fair Value method, based on internationally accepted valuation methods and not on a 50:50 basis and, which, cannot in any way, result in a loss of value to minority shareholders,” the spokesperson said.

“There is no question of loss of wealth to any shareholder since all the companies as well as assets involved in the merger continue to reside and be reflected in the value of the merged entity. There is no asset held by any of these companies, which do not find their way into the resultant merged entity.”

The merger has been approved by both National Stock Exchange and Bombay Stock Exchange.