modes of restructuring (incl case studies)

PricewaterhouseCoopers

Modes of Business Reorganisation*October 2009

*connectedthinking PwC


• Restructuring – An Overview

» Why Restructure

» Methods of Restructuring

» Important regulations

• Newer Modes of Restructuring

» Leveraged Buyouts

» Delisting

• Case Studies

Table of Content


Restructuring – An Overview


Corporate Restructuring

JV / Alliance

Family

Arrangement

Unlock Value

Pre IPO

Tax Efficiency

Balance Sheet

resizing

Acquisitions Regulatory

Why Restructure


• Horizontal

• Vertical

• Conglomerate

• Triangular

• Acquisition of

promoters stake

• Open offer

• Asset acquisition

• Business

acquisition

• Demerger of

division

• Slump Sale

• Itemised Sale of

Assets

• Part IX

• Sale of business

Spin offCorporatizationAcquisitionsMergers

Methods of Restructuring

• Buy Back

• Capital

Reduction

Others


SEBI

CompaniesAct

Indirect tax

Competition Act

FDI

Accounting Implications

Exchange Control

Stamp duty

Tax regulations

Multiple laws affect every M&A action

Important Regulations


Newer Modes of Restructuring


• LBO is a strategy where a financial sponsor gains control of a majority of a

target company’s equity through the use of borrowed money or debt.

– In an LBO, there is usually a ratio of 70% debt to 30% equity

• The purpose is to allow companies to make large acquisitions without having to

commit a lot of capital.

• In LBO, assets of the acquired company act as collateral for the debt

• The exit strategy for the LBO is generally to break up and sell the acquired

company or conglomerate or an IPO of the acquired company

• Usually leveraged buyout firms look to achieve an IRR in excess of the WACC

Leveraged Buyouts


• “Delisting” of securities means permanent removal of securities of a listed

company from a stock exchange. As a consequence, the securities of that

company would no longer be traded on that stock exchange

– Different from ‘Suspension” or “Withdrawal” of admission to dealings of the

securities on the Exchange

– Different from “buy-back” of securities in which securities of the company

are extinguished with consequent reduction of capital of the company

• Failure to comply with minimum public shareholding criteria shall attract

Delisting Regulations

• Flexibility in decision making, onerous corporate governance obligations may

prompt companies to opt for delisting

• Need to comply with Reverse Book Building Process

– Prone to influence by bulk shareholders / traders

Delisting


Case Studies


Case Study 1 - Business Consolidation


Grasim Shareholders

Ultratech

Case Study 1

Present

Grasim

Others Cement

Samruddhi

55%

UltratechShareholders

45% 100%

Grasim Shareholders

Samruddhi

Grasim

Cement Others

Ultratech

55%


45%65%

35%

Post Demerger

• Scheme proposed to demerge the Cement division of Grasim into its WOS Samruddhi

• Samruddhi to issue 1 equity share for every equity shares held in Grasim

• Grasim’s stake to be diluted to 65%

• Samruddhi to be listed pursuant to demerger


Case Study 1

• Post Demerger, Samruddhi to be merged with UltraTech

• Grasim to hold stake between 55% - 65%, post merger

• Maintaining adequate control in UltraTech – Reason for a two stage consolidation

• Stamp Duty payable twice – 1st on demerger and 2nd on merger

Grasim Shareholders

Samruddhi

Grasim

Cement Others

Ultratech

55%


45%65%

35%

Post Demerger

Grasim Shareholders

Grasim

Ultratech

B%


(1-A-B)%

A%(55%<A<65%)

Proposed Structure

Merger


Case Study 2 - Restructuring for Regulatory

Compliance


• Only 26% total foreign equity shareholding allowed in News business

• Only 49% total foreign equity shareholding allowed in Cable business & Direct to home

(DTH) business

• As per MIB guidelines of uplinking for news channel – largest Indian shareholder should

hold atleast 51% of the total equity capital of the broadcasting company

Indian Promoters

Foreign Promoters

FIIBalance

(including public)

Listed Co.

24% 22%31%23%

Pre-restructuring

News business Cable businessDTH business Entertainment business

Business cylos in List Co

Segregation of business for value unlocking, transparency and capital inflow

Case Study 2 . . . .


• News business of ListCo was demerged into SPV 1

- Entire Foreign Promoter holding in the news company transferred to Indian promoters

- Scheme provided that FIIs over certain % on the record date to be issued Preference

Shares, to ensure, FII stake does not cross the prescribed FDI limits

• Cable and DTH business of ListCo were demerged into two separate companies viz. SPV 2

and SPV 3 respectively

• As in the case of News Business, part of the foreign promoter holding in the two resulting

entities was transferred to Indian promoters to comply with regulatory guidelines

. . . .Case Study 2

• Resulting structure FDI compliant.

• Possible to have a clear-cut leadership

and direction for the growth Ease of entry

for strategic investors

• Value unlock

Benefits

SPV 1 (News Business)

SPV 2 (Cable Business)

SPV 3 (DTH business)

Shareholders

Resulting shareholding


Case Study 3 - International Listing


• UTV Mauritius, was set up as a WOS of

UTV India, for engaging in exploitation of

overseas rights

• Subsequently, UTV Mauritius acquired the

movie portfolio (library of existing movies)

of UTV India and ventured into co-

production of movies

– Funding requirement for the expansion

• UTV India incorporated a company in Isle

of Man (‘IOM’) and diluted its stake for AIM

listing

• UTV Motion Pictures infused funds in UTV

Mauritius

UTV India

UTV Mauritius

100%

76%

AIM Investors

24%

UTV Motion Pictures (IOM)

Movie Production and rights exploitation

UTV India

UTV Mauritius

~100%

>1%

Case Study 3


Case Study 4 - LBO


Singapore Co

Corus

Tata Steel India

UK Co 1

UK Co 2

UK Co 3

Tata Steel UK

100%

Debt

Debt

Debt

Debt

100%

100%

100%

100%

---- To be merged with Corus

• Combined entity to become 5th largest producer of steel

from 56th

• Would have taken several years for Tatas to build an

enterprise of a size of Corus

• Acquisition to provide significant presence in Europe

Methodology

• SPV’s were floated in UK under the name Tata Steel UK.

Tulip Holdings (1,2,3) which were ultimately held by a

Singapore SPV

• Tata Steel alongwith the SPV’s incorporated in Singapore

and UK raised the requisite debt of USD 8.12 bn constituting

68% of the total acquisition value of USD 12 bn. Monies

raised by way of debt was pushed in each subsequent

subsidiary and ultimately in Corus.

• Following loan facilities were used for financing the

acquisition:

– Bridge Facility; Term Loan; Revolving credit facility;

Equity of $3.88 bn

Acquired Corus out of $3.88 bn & long term debt of $8.12 bn from consortium of banks



• Tata Steel acquired CORUS plc. for $12 bn

– Equity Contribution of $ 3.88 bn &

– Borrowings of $8.12 bn through subsidiaries

• Tax consolidation in UK, tax shield on interest available to Corus

• Debt-equity ratio of funding is 68:32

• Possible merger of Tata Steel UK with Corus

. . . . Case Study 4


Case Study 5 - Off shoring of business


• BILT is listed on BSE and NSE and is engaged

in manufacture and sale of paper

• Pursuant to a Scheme of arrangement and

reorganization, 3 undertakings of BILT were

transferred to BGPL in exchange of equity

shares of Rs. 450crs and debentures of Rs.

1500crs of BGPL

• Scheme also provided for buy back of 40% of

the post-split equity shares of BILT

- Option to shareholders holding 1,000 equity

shares or less to sell their entire holdings in

List Co

• BILT transferred the shares and debentures

received above to BPH

- Funds received from BPH to be utilised for

retirement of debts and to fund buyback of

its shares

Ballarpur Industries Ltd. (BILT)

BallarpurInternational

Holdings, B.V.(Netherlands)

100%

Sabah

Ballarpur Paper Holdings B.V.

(‘BPH’)

BILT Graphic Paper Products

Ltd. (BGPL)

100%

100%

Issue of Equity Shares of Rs.450 crs and Non-Convertible Debentures of Rs.1500 crs

Transfer of equity shares and debentures of BGPL to BPH for cash consideration

97.8%

The restructuring prepares BPH and BIH for future listing in the international market

Case Study 5

A

A

B

B


Case Study 6 - Right Sizing Balance Sheet /Utilisation of SPA


Accounting losses in the Balance sheet

Solution• Adjust the asset/ deficit against Securities Premium account/ other

reserves

Effects: • Achieves rightsizing of the Balance sheet• No negative impact on financial ratios (except diminution in value of

assets)• Improves capital market perception• Check MAT implications

Determinants

Diminution in value of assets / intangible assets

Deficit created pursuant to mergers/ demergers

Affects capital market perception

Issues

Inability to pay dividend despite profits

Hit to the Profit & loss account



• Scheme of Arrangement between Sintex Industries Limited and its Equity Shareholders

- The Company has been making acquisitions and strategic partnerships in India as well

as overseas;

- Proposal to create an “International Business Development Reserve” (‘IBD Reserve’)

by appropriating Rs. 200 crs from its SPA as on March 31, 2008

» Reserve so created to be utilised by the Company towards the acquisition

expenses

- Aforesaid restructuring carried out under Scheme of Arrangement under Section 391

read with Sections 78, 100 to 103 of the Cos Act

- Scheme approved unanimously by all the Equity Shareholders and sanctioned by the

Gujarat High Court



Case Study 7 - Back Door Delisting / Privatization of Business


• KPL carries out real estate and tobacco business

• Scheme of Arrangement between KPL and PPIL

- Scheme provided for demerger of Tobacco

Division, Beverages Division & Trading

Division from KPL to PPIL;

- KPL is listed on BSE, NSE

- Discharge of consideration by issue of Non-

cumulative Redeemable Non-convertible

Preference Shares

- NoC to Scheme from the Stock Exchanges

and approval by majority of shareholders

- Scheme sanctioned by the Allahabad High

Court

- May be construed as back door delisting

Kothari Products Limited (KPL)

Pan Parag India Limited (PPIL)

Objective was to separate tobacco business due to risk associated and ease the fund raising in real estate

Shareholders

Real Estate

Tobacco

Dem

erg

er

of

To

bacco

bu

sin

ess

Case Study 7A – Kothari Products


• Macmillan is listed on BSE, NSE

• Scheme of Arrangement providing for merger of two WOS into Macmillan and demerger of

Publishing Business into Macmillan Publishers, a company floated by promoters

• Scheme provided that the Macmillan Publishers will not be listed on any Stock Exchange

pursuant to the Scheme

• Consideration for Demerger discharged in the form of issue of Equity Shares of Macmillan

Publishers to shareholders of Macmillan in accordance with the exchange ratio

• Exit opportunity was provided to all the shareholders except promoters to -

- retain shares in the unlisted Resulting Entity; or

- offer to sell the shares in the unlisted Resulting Entity to promoters;

- If no option exercised within 3 months from the Record Date –deemed such members

have chosen to transfer shares of Macmillan Publishers to promoters

- Shareholders to have option to return the cheque along with a letter exercising the

option to continue as shareholder within 60 days of receipt of the cheque

Case Study 7B – Macmillan


• English Indian Clays (‘EIC’) engaged in business of clay mining

& refining and manufacture of starch and allied products

• Objective was to delink the investment division and to squeeze

out the minority shareholders therein

• As a part of restructuring, investment division was demerged to

Bharat Starch; options to shareholders:

– BPL to issue 4 Equity Shares for 19 shares in E Ltd.

– Option to receive 400 CRPS for 19 Equity shares in E Ltd.

– 8% CRPS, tenure 10 years

- Shares issued pursuant to demerger would not be listed

- Option to shareholders to sell equity shares to promoters at

the rate of Rs. 1000 each, till 1 year from the record date

Case Study 7C – English Indian Clays

Bharat Starch(Unlisted)

English Indian Clays

InvstmtUnit

Shareholders*

* Various Options to Shareholders


Case Study 8 - Family Arrangement


• Reliance, amongst the most pioneer groups of India

• As a part of family arrangement, the business of Reliance was segregated into five undertakings which were hived off into

four subsidiaries. Each of these subsidiaries issued its shares to the shareholders of RIL in the ratio of 1:1

32

ASSETS• Fixed assets• Shares in REL, RPL,

Hirma Power Pvt Ltd, JayamkondamPower Pvt Ltd, Reliance Thermal Energy Pvt Ltd etc.

• Loans and Advances

LIABILITIES• Related Loans

PERSONNEL

Reliance Industries Ltd

Coal based energy

Undertaking

Reliance Industries Ltd Shareholders

ASSETS• Fixed assets• Shares in Reliance

Patalganga Power Ltd.

• Loans and Advances


PERSONNEL

ASSETS• Fixed Assets• Shares in RCL,

Reliance General Insurance, Reliance Life Insurance

• Loans and advances


PERSONNEL

ASSETS• Fixed assets• Receivables for

capital leases• Shares in RCIL,

Reliance Telecom, Reliance Infocomm, World Tel holding Ltd., Preference shares of Reliance Telecomm

• Loans and AdvancesLIABILITIES• Related LoansPERSONNEL

Gas based energy

UndertakingFinancial Services

Undertaking

Telecom

Undertaking

Remaining

Undertaking

Reliance Energy Ventures Ltd (‘REVL’)

Reliance Natural Resources Ltd (formerly Global Fuel Management

Services Ltd.)

Reliance Capital Ventures Ltd (‘RCVL’)

Reliance CommunicationsVentures Ltd

• Petrochemicals, Oil & Gas, Textiles and other business



• RCVL was subsequently merged with Reliance Capital Ltd (RCL)

- 5 equity shares of face value of Rs. 10 each were issued to the shareholders of

RCVL for every 100 equity shares of the face value of Rs. 10 each

- Appointed Date = Effective Date

• REVL merged with REL

- 7.5 equity shares of face value of Rs. 10 each were issued to the shareholders of

REVL for every 100 equity shares of the face value of Rs. 10 each

- Appointed Date= Effective Date

• Benefits of the restructuring

- Value unlock

- Segregation of business thereby providing settlement between family members

- Investment opportunities to investors for different segments



Case Study 9 - Business Acquisition



a) Demerger of Cement business into UltraTech Cemco

b) Issue of shares by Cemco – 80% (68% + 12%) to L&T shareholders and 20% to L&T

c) Grasim acquires another 8.5% stake in Cemco from L&T for Rs. 362 crs

d) Grasim makes an open offer to acquire 30% in Cemco – total outflow for Grasim - Rs. 1,278 crores

e) Grasim sells its 15% stake in L&T to the Trust for Rs 446 crs – Trust funded by L&T

Grasim 15%

Grasim’s ultimate shareholding

– 51%

Other Shareholders

85%

L&T Employees Trust

L & T

Ultra TechCemcoLtd.

Engineering Cement(a)

(b)

(b)

20%

68%

12%

(e)

(b)

Grasim 15%

Grasim’s ultimate shareholding

– 51%

Other Shareholders

85%

L&T Employees Trust

L & T

Ultra TechCemco Ltd.

Engineering Cement(a)

(b)

(b)

20%

68%

12%

(c)

(e)

(b)

(d)

Issue of Shares

Transfer of shares

Shareholding


• Demerger scheme compliant with tax provisions

• Grasim with 51% shareholding acquires control of Cemco

• L&T management gets control of 15% (held through the Trust) stake previously held by

Grasim


37.4%67.4%85.00%85.00%Other Shareholders

51.1%12.6%15.00%15.00%Grasim

11.5%20%--

L&T

in Ultratechin L&T

Post Restructuring shareholding in Ultratech

Post Demerger ShareholdingPre - Restructuring Shareholding in L&T

Particulars


Case Study 10 - Cross Border Merger


• Scandent is a company listed on BSE, NSE,

Madras Stock Exchange and Ahmedabad

Stock Exchange and is engaged in IT sector

• Cambridge was a Delaware based holding /

investment company which held investment in

operating companies engaged in IT / ITES in

US and other jurisdictions

• Scandent wanted to acquire Cambridge and

hence as a part of restructuring Cambridge

was merged with Scandent

- Merger of Delaware company with Indian

company permitted as per Delaware laws and

Indian laws

- Scandent issued shares to the shareholders of

Cambridge as consideration for merger

Objective was to acquire Cambridge without any cash outflow

Shareholders

Cambridge

Scandent

Merger

Issue o

f

shares

Case Study 10


Thank You

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