Birla Deal Would Dilute Minority Owners, Proxy Adviser Says

(Bloomberg) -- Billionaire Kumar Mangalam Birla’s proposal to merge Grasim Industries Ltd. and Aditya Birla Nuvo Ltd. would dilute minority shareholders while boosting control for the largest owners, a proxy advisory said in a report.

The combination, which Birla has said will create a $9 billion conglomerate, follows the group’s strategy of the past 15 years to raise promoters’ shareholding in listed companies, Mumbai-based Institutional Investor Advisory Services, or IIAS, said.

“Across the group, the promoter family’s control over the listed companies has been higher than its direct shareholding,” IIAS said in an Aug. 19 report. The advisory will make its voting recommendation to investors after seeing the shareholder notice with more details of the plan.

Aditya Birla Group said Aug. 11 it planned to combine its telecom and financial businesses with its cement, viscose fiber and chemicals units. Shares of the company and Grasim Industries Ltd. fell amid concern the merger would burden them with unrelated businesses.

The plan would increase promoters’ holding in post-merger Grasim to 39 percent from 31.3 percent currently, without any fund infusion, according to the IIAS report.

Birla group spokeswoman Pragnya Ram did not immediately reply to e-mailed requests for comment on the IIAS report.

The merger will help the financial services unit raise money and give Grasim investors access to high-growth businesses, Ashish Adukia, head of Birla group corporate finance, told Bloomberg Aug. 15. The increase in promoter shareholdings was not the motive behind the merger, he said.

Aditya Birla Nuvo shares gained 1.1 percent to 1,203.05 rupees at 10:19 a.m. in Mumbai Tuesday and have lost about 18 percent since the merger was announced. Grasim’s shares rose 1 percent to 4,544.85 rupees and have declined about 14 percent since local media started reporting a possible deal around Aug. 8.

As Grasim becomes the group’s holding company, “it will become difficult to value the company correctly,” the report said. “Therefore, the market is likely to punish the stock.”

To contact the reporter on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net. To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, Dave McCombs, Daryl Loo