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Corporate Restructuring: A Quick Guide

Created on 30 Nov 2023

Wraps up in 9 Min

Read by 1.8k people

Updated on 01 Dec 2023

Hello there! 👋 Welcome back, reader! In today's article, we're diving into the practical aspects of demergers, exploring the concept through insightful case studies. To ensure a solid understanding, I recommend checking out our comprehensive guide, "Everything you need to know about Demergers."

While I won't delve deeply into the financial intricacies here, (rest assured that we have separate articles in the pipeline) each dedicated to dissecting the financial aspects of specific case studies. The overall structure of this piece will be as follows:

Let’s get started!!

Piramal Pharma Limited: A Prescription for Growth

Beginning with the demerger of Piramal Pharma Limited from Piramal Enterprises Limited, let's delve into a brief snapshot of both companies. 
Allow me to introduce you to the powerhouse pair – PEL and PPL. They're like the Batman and Robin of the corporate world. 🦸‍♂️🦸‍♂️

  • About Piramal Enterprises Limited

- Piramal Enterprises Limited (PEL) is a prominent Indian company with a focus on financial services and pharmaceuticals.

- PEL engages in both retail and wholesale financing, providing a range of diverse financial products.

- In the retail lending sector, PEL extends home loans, small business loans, and working capital loans, catering to customers in affordable housing and mass affluent segments across different cities.

- The company also offers wholesale lending services to real estate developers and corporate clients.

- PEL has established notable partnerships, collaborating with entities such as CPPIB, APG, Ivanhoe Cambridge, and others across various investment platforms.

  • About Piramal Pharma Limited

- Piramal Pharma Limited (PPL) operates globally with 15 manufacturing facilities and a distribution network spanning 100+ countries.

- PPL comprises three key divisions:

  1. Piramal Pharma Solutions (PPS): Specialised in development and manufacturing, offering comprehensive solutions for innovator and generic companies.
     
  2. Piramal Critical Care (PCC): Focuses on hospital generics, with a product portfolio including inhalation anaesthetics, therapies for spasticity and pain, injectable pain and anaesthetics, injectable anti-infectives, and more.
     
  3. India Consumer Healthcare: Engaged in the sale of over-the-counter products.
  • Corporate Landscape: PEL handles both money matters and medicine. Meanwhile, its sidekick, PPL, focuses on making and spreading pharmaceutical goodies worldwide. Quite the tag team, right?
     
  • Rationale for Demerger: The demerger aimed to provide focus, flexibility, and speed to the pharmaceutical business, allowing both entities to pursue growth independently and insulate them from each other's risks.

Shareholding and Strategic Rationale: Now, grab your popcorn and check out these shareholding pattern glow-ups before and after the demerger! 👇

PIEL’s corporate structure (prior to the demerger of the Pharma business)

PIEL’s corporate structure (prior to the demerger of the Pharma business)

Now, check PEL Structure post-demerger

PEL Structure post-demerger

PPL Structure Post-Demerger

PPL Structure Post-Demerger

  • Share Entitlement Ratio: In consideration of the transfer of the Demerged Undertaking from PEL to PPL, for every 1 equity share of face and paid-up value of ₹2/-  held in PEL, 4 equity shares of face and paid-up value of ₹10/-  in PPL shall be issued by PPL, in accordance with the Share Entitlement Ratio.
  • Conclusion: The demerger of Piramal Pharma Limited from Piramal Enterprises Limited proved to be a strategic move, enhancing sustainability and creating value for stakeholders. The case study showcases how the decision contributed to the growth and success of both entities in their respective domains.

Next up, is, 

Dhampur Sugar Limited: A Sweet Division

Get ready for the sugar rush! Dhampur Sugar Limited is breaking down its sweetness into equal parts in this demerger tale.

  • A brief Introduction: With nearly nine decades of sweet success, Dhampur Sugar Mills Limited (DSML) stands as one of India's leading sugar manufacturers. In a strategic move, the company has recently announced a demerger, dividing its operations into equal parts. 
     
  • Operations Overview: DSML's operations are integrated, covering cane crushing, raw sugar refining, ethanol production, and power generation. The company has five manufacturing units across Uttar Pradesh, producing a variety of products, including refined sugar, power, ethanol, and other allied products. 🏭
     
  • Promoter Groups: The demerger involves the separation of operations between the "GV Promoter Group" and the "GT Promoter Group," each holding 24.48% equity shares of DSML. This division is a key component of succession planning within the Goel family.
     
  • Share Swapping: The demerger proposes a share swap ratio of 1:1, meaning shareholders holding 100 shares of the Demerged Company will receive an additional 100 shares of the Resulting Company as a bonus.
     
  • Swapping Between Promoters: The demerger scheme outlines two options for share swapping between the GV and GT Promoter Groups. Option 1 involves a straightforward exchange, while option 2 allows for a swap with optionality, providing additional safety through a call/put option.
     
  • Deal Structure: Details regarding the cash transaction, share price discrepancies, and the impact on capital gains taxes remain unclear. The importance of understanding the transaction's structure for shareholders and stakeholders is being emphasised. 🤔
     
  • Succession Planning: The demerger aims at effective succession planning, clearly defining the responsibilities and control each promoter group will have over specific manufacturing units. It involves the transfer of assets, liabilities, and intellectual property rights.
     
  • Conclusion: The primary objective of the demerger is to ensure a smooth transition in the leadership of DSML, fostering business continuity and family harmony.

Hero Honda Ltd.: The Road to Independence

Remember that time Hero and Honda were the ultimate biking duo? Well, they had a breakup, and we've got the deets!

  • Introduction: Hero Honda, a joint venture between Hero Group and Honda, marked a significant chapter in India's two-wheeler industry. This case study explores the demerger of Hero Honda Ltd., shedding light on the reasons behind the separation and the visions that emerged post-demerger.
     
  • Joint Venture Dynamics: Founded in 1944, Hero Honda became a major player in the motorcycle industry through its joint venture with Honda in 1984. The venture continued successfully for nearly three decades.
     
  • Reasons for Demerger: Before 2008, Hero MotoCorp Ltd. and Honda Ltd. were like a well-oiled machine. However, things got bumpy when Honda launched a new motorcycle in India, breaking their agreement. Hero wanted to invest big in research, creating a threat toHonda, which was getting royalty for the engine. Plus, Honda had more say on the board, and when Hero tried to export products, Honda didn't lend a helping hand. The road got rocky, leading Hero to initiate talks to end the partnership.
  • Post-Demerger Visions: 

Hero MotoCorp
👉 10 million Volume Company
👉 10% volume from exports
👉 Cumulative sales of 100 million two-wheelers by 2020
Honda
👉 Honda aimed at becoming market leader in India by 2020 and sells no less than 10 million two-wheelers in India alone.
👉 With the impending Honda threat, Hero MotoCorp had begun looking outward growth even as things got hot under the collars in its home market, India.

  • Financial Details: Now, let's crunch some numbers – Hero MotoCorp style. Check the table below for financial details:

Hero MotoCorp’s performance Pre and Post-Demerger

Particulars

Pre-Demerger

Demerger

Post-Demerger

Year

2008

2009

2010

2011

2012

2013

2017

2018

2019

2020

Net Sales (%)

10,345

12,325

15,839

19,397

23,579

23,768

28,500

23,230

33,650

28,836

Net Profit (%)

8.04

9.46

13.3

9.26

9.42

7.37

11.84

11.47

10.5

12.29

ROCE (%)

50.99

49.05

48.76

55.76

51.47

37.53

46

44

39

27

EPS

48.76

64

111

96

119

106

169

185

169

181

  • Conclusion: Hero MotoCorp, India's biggest bike maker, owns nearly 40% of the market, leaving Honda Scooter India Ltd., its former partner, trailing by at least 14%. Since the split, Hero has evolved into one of India's most valuable businesses, sticking to its legacy of making top-notch bikes. Their rising sales and profits show they're hitting the road in style. Investing in Hero is like hitting the jackpot – reliable and rewarding. Post-demerger, Hero is now reaching more countries, setting up new plants, and delivering sweet returns to investors. It's a standout success story in its own league.

Hindustan Unilever Limited: Exporting Success

This case study is concise.

  • Introduction: Hindustan Unilever Limited (HUL), a giant in the fast-moving consumer goods (FMCG) industry, demerged its FMCG export business into Unilever India Exports Limited (UIEL). This case study delves into the motivations behind the demerger and evaluates the financial performance of both entities in the pre and post-demerger periods.
     
  • Corporate Legacy: HUL, a British-Dutch conglomerate, has been a leader in the FMCG sector in India. The demerger involved transferring the FMCG exports business to UIEL, a wholly-owned subsidiary.
     
  • Rationale: To fully exploit opportunities in the export market and provide focused attention to the business, HUL decided to demerge its FMCG exports, leading to the creation of UIEL.
     
  • Financial Performance Analysis:

Comparative Analysis between Pre-Demerger and Post-Demerger Period

Particulars

Pre-demerger Average (HUL)

Post-demerger Average (HUL)

Post-demerger Average (UIEL)

Net Profit Ratio (%)

14.64

16.77

15.99

Return on Total Assets (%)

28.09

37.77

30.17

Return on Investment after Tax (%)

73.13

99.44

41.08

Earnings Per Share (Rs.)

8.77

14.59

382.68

EVA on Average Capital Employed (%)

56.23

82.54

26.32

  • Comparative Metrics: The case study employs traditional financial metrics and modern measures like Economic Value Added (EVA) to compare the financial performance of HUL in the pre and post-demerger periods.
     
  • Conclusion: HUL decided to shake things up by demerging its FMCG export business. And guess what? It worked like a charm! Checking out the financial vibes post-demerger, it's like watching a stock market superhero take flight- both the traditional and modern measurements are giving it a thumbs up.

Now, HUL is not just running the race; it's acing it in both short and long-term sustainability. And let's talk about UIEL, the new kid on the block – not only is it rocking a good return on investment, but it's also throwing a value party for its stakeholders. So, to cut a long story short, this whole corporate restructuring gig through demerger? Nailed it! 🚀

Now, let's spill the tea on the lessons learned.

Key Insights from the case studies

From the above case studies on demergers, several key insights can be drawn:

1. Strategic Decision-Making for Succession Planning:
   - The case of Dhampur Sugar Limited highlights the importance of demergers in family-owned businesses for effective succession planning.
   - Succession planning involves careful consideration of business divisions, ownership structures, and the roles of family members in different segments.

2. Promoter Group Management and Equity Swapping:
   - The case of Dhampur Sugar Limited emphasises the role of promoter groups in demergers and the strategic swapping of equity to ensure smooth transitions.
   - The use of different options for share swapping, as presented in the case, provides flexibility to the promoter groups in managing control and ownership.

3. Valuation and Share Issuance:
   - The valuation and swap ratio process, as demonstrated in Dhampur Sugar Limited, is critical for ensuring fairness to shareholders in the demerged and resulting companies.
   - The issuance of new shares post-demerger and their listing on stock exchanges play a vital role in the financial restructuring of the entities.

4. Reasons Behind Demerger:
   - The Hero Honda case illustrates that conflicts and changes in business strategies, such as new product launches and research and development plans, can lead to the decision to demerge.
   - Demergers can address issues related to governance, information sharing, and conflicting business interests between joint venture partners.

5. Financial Performance and Growth Trajectory:
   - The analysis of Hero MotoCorp post-demerger showcases the positive impact on the company's growth trajectory and financial performance.
   - Demergers can provide companies with the flexibility to pursue independent growth plans and strategic alliances.

6. Synergies and Value Unlocking:
   - The case of Piramal Pharma Limited highlights the strategic rationale behind demerging distinct businesses to unlock value and create dedicated platforms.
   - Simplifying corporate structures and establishing separate entities can lead to enhanced governance and focused management.

7. Market Presence and Global Expansion:
   - The global presence of companies like Hero MotoCorp, as seen in the joint venture with Bangladeshi Nitol Niloy, emphasises the potential for market expansion post-demerger.
   - Demergers can facilitate international collaborations and market penetration.

8. Financial Performance Metrics:
   - The financial performance metrics used, such as Net Profit Ratio, Return on Total Assets, Return on Investment, Earnings Per Share, and Economic Value Added, provide a comprehensive view of the impact of demergers on companies.

9. Importance of Corporate Restructuring:
   - The case of Hindustan Unilever Limited underscores the significance of corporate restructuring for both short-term and long-term sustainability.
   - Demergers can contribute to improving financial indicators and enhancing the value generated for stakeholders.

The Bottom Line

And there you have it – a blockbuster of demerger stories! It's like a Netflix binge but for corporate makeovers. Dive into our case studies, and you'll see the behind-the-scenes drama, the reasons why, and how it transforms companies.

In plain speak, demergers are like savvy chess moves. When done right, they fix problems, pave the way for new leaders, boost a company's value, and set them up for  some serious growth. Each case study is like a different episode of a show – unique stories and different characters, but all about how demergers shake things up in the business world. So, here's to the power of change, the thrill of the unknown, and the exciting world of demergers! 

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Sakshi Dhakre

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Sakshi is an adventurous spirit who enjoys both the intellectual stimulation of Finance and the sensory experiences of good food and nature’s beauty. She has a passion for delving into complex financial topics and distilling them down into easy-to-understand insights. When she's not poring over financial reports, you might find her exploring a new corner of the city, trying out new restaurants and cuisines or admiring the beauty of the night sky.

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