Corporate Restructure

8/8/2019 Corporate Restructure

1/26

PRESENTED BY:-PRITPAL SINGH BHULLAR

B.TECH(MECHANICAL), MBA (FINANCE)


2/26

A group can sell the assets of an entire company or business

unit such as subsidiary, a smaller unit or a product line.

Two types of sell off A) Spin Off

B) Divestiture


3/26

Create new separate legal entity.`

Shares are distributed among existing shareholders on parent

company on pro-rata basis.

New entity has power to make independent decisions.

Types of Spin Off

A) Split offs

B) Split ups


4/26

1) Tax free to company and shareholders receiving shares in spin

off

2) Smaller underwriting discounts and fees

3) Effective method for minimizing the execution risk ofdivestiture ( Third party negotiations , Market conditions)


5/26

Lack of Liquidity

No monetarily gain to parent company

New company has to incur expenses for issuing new shares

Selling pressure from institutions and index funds immediatelyafter spin off. This leads to downward pressure on the stock

price in the short term.


6/26

Sun Pharma demerged its R&D business as a separate entity

Sun Pharma Advance research company(SPARC) to reduce

R&D cost. Dr. Reddys formed new drug development company Perlecan

Pharma, in may 2006.


7/26

Acquisition of all the stocks or assets by a small group of

investors, primarily financed by borrowing.

STEPS OF LBO Arrangement of finance

Taking the company private

Restructuring

Reverse LBO


8/26

10% of financing is undertaken by LBO specialist

Rest comes from Merchant Bankers, Venture capitalists and

commercial banks


9/26

Shares and assets of target company is purchased by Buy-out

specialist


10/26

Consolidation and reorganizing the existing production

facilities

Changing the product mix

Reducing excess employment Reducing R&D costs and costs related to purchasing new

plants and equipments

Getting better terms from suppliers

Selling of parts of corporation to reduce debts


11/26

Investors may take the company public again if the goals set by

the LBO groups have already been achieved.


12/26

Major funds for financial restructuring is borrowed from

market. Cost of debt increase.

Many employees lose their jobs

New management concentrates on short term goals(reductionof debt burden). It hampers firms growth in long run.


13/26

EXPENDITURE AMOUNT ( in mn pounds)

Tetley Acquisition Cost 271

Banks and legal services 9

Tetleys working capital

requirement

25

Total 305


14/26

Total Amount 305

Through Debt 235

Through Equity 70

Total Debt 235

Rabo bank 185

Schroders 10

Prudential MezzanineCapital

10

Intermediate Capital Group 30


15/26

Sale of portion of business to third party

Assets, Product lines or subsidiaries

No new legal entity is created


16/26

Focus on core business for the divesting firm

Declining profitability of business

Getting rid of unprofitable business

Need for funds for other activities


17/26

Grasim Industries divested its loss making fabric

manufacturing in Gwalior to Melodeon exports ltd. And its

associates. Now company decided to manufacture its both

brands (Grasim and Graviera) at single location at Bhiwani.

ITC group divested its ITC classic Finance which was loss

making company. ITC finance then merged with ICICI


18/26

Tool used against hostile takeover

Shares are undervalue in the market

Company has surplus funds

METHODS

A) From existing shareholders on a proportionate basis through

tender offer

B) From Odd-Lot holders

C) From open market through:- Stock exchange

Book building process

Through Dutch auctions


19/26

Company inform its shareholders of the price at which it

wishes to buy back its shares.

Company makes public its intention to buy back its shares

through leading newspapers. Company specifies the date by which the name of shareholders

has to be determined.

Offer remains open to shareholders for not less than 15 days

and not more than 30 days.

The date of opening the offer should not be earlier than 7 daysafter or later than 30 days after the date specified for the

determination of the name of shareholders.


20/26

Company fixes the maximum price for the buy back through a

special resolution.

Appoints a Merchant Banker

Public the details of the brokers and stock exchanges throughwhich the purchases would be made by making public

announcement

Stock exchanges should have electronic trading facilities

Company and merchant banker have to inform the stock

exchanges about shares purchased.


21/26

A special resolution needs to be passed specifying the

maximum price of the buy back.

The company announces the merchant banker and makes a

public announcement regarding this at least 7 days prior to thecommencement of buy back

Company should submit a copy of process to SEBI within two

days with specified fees

Company should arrange bidding centers minimum number 30

Company explains the method of book building process. Buy back price is decided jointly by merchant bankers and

company.

Highest price accepted becomes the buy back price.


22/26

The goal of a Dutch auction is the find the optimal price at

which to sell a security.

Price is set by the shareholders by specifying the volume of

shares they would like to sell. Shareholders are asked to inform the company about the

number of shares and price at which they would like to sell

their shares.

Offer is open for minimum 15 days and maximum 30 days.

Maximum price is few percentage points higher than marketprice.

The price a shareholder gets in a Dutch auction is usually less

than what he would get in a tender offer.


23/26

If the number of shares tendered exceeds than expected, then

the company purchases less than all shares tendered at or

below the purchase price on a pro rata basis to all who tendered

at or below the purchase price.

If too few shares are tendered, then the firm either cancels the

offer or it buys back all tendered shares at the maximum price.


24/26

Reliance energy buy back its shares for a maximum price of

Rs. 525 per share to reduce volatility its share price.

Bajaj Auto ltd. Buy Back its shares up to15

% of its paid upshare capital at a maximum price of Rs.450 per share.


25/26

A special resolution has to be passed in general meeting of the

shareholders

Buyback should not exceed 25% of the total paid-up capital

and free reserves A declaration of solvency has to be filed with SEBI and

Registrar Of Companies

The shares bought back should be extinguished and physically

destroyed

The company should not make any further issue of securitieswithin 2 years, except bonus, conversion of warrants, etc.


26/26

Unused Cash

Tax Gains:- Dividends are taxed at higher rate thancapital gains companies prefer buyback to reward

their investors instead of distributing cash dividends,as capital gains tax is generally lower.

Market Perception :- In October1987 stock prices in USstarted crashing. Expecting further fall many companies like

Citigroup, IBM et al have come out with buyback offers worthbillions of dollars at prices higher than the prevailing rates.

Increased promoters stake Exit option

Documents

Corporate Restructure