Announcing the development at the company's 11th annual general meeting held in Mumbai on Tuesday, Marico chairman CV Mariwala told shareholders that the boards of Marico and BOIL have reached an understanding to assign the two brands to Marico.

While the move is expected to boost investors' confidence levels, it will put to an end the classic "Poison Pill" defence mechanism which automatically protected Marico from the predators' hands as the key brands were safe under BOIL's custody.

Reacting to the news, the Marico scrip on the BSE closed at higher level of Rs 571.15 compared to Monday's close of Rs 562.

According to Marico managing director Harsh Mariwala, "The valuation was in the range of Rs 30-70 crore for the two brands. However, the final consideration was arrived at the capitalised value of royalty (Rs 30 crore) and not at the full market value of the brands,which would have been much higher."

This was done in recognition of the fact that Marico has significantly enhanced the brand equity of Parachute and Saffola, and that as of now, barring payment of royalty and lack of "total" legal ownership, the two brands were fully "available" to Marico. It was considered sound to peg the price for the assignment at the capitalised value of royalty rather than the market value.

The valuation of the brands was carried out by chartered accountants Deloitte Haskins & Sells and merchant bankers IL&FS.

The assignment of brands will take effect before June 30, 2000, and Marico is expected to discharge the full consideration during April-June next year, said Mariwala. He said that Marico will finance the payment out of its internal accruals and short-term borrowings.

Till then, Marico will continue to pay royalty on the two brands which were on a perpetual lease to the company. The royalty would stop on payment of the full consideration for the brands next year. Marico ispaying a royalty of 0.75 per cent of the net ex-factory sale price of the two products. No royalty is payable on any extensions of these two brands and the extensions would belong to Marico Industries.

According to Mariwala, investors have been apprehensive for a while on the issue of the two brands which are key to Marico but were not in its ownership.

In fact, six months back, markets were agog with rumours on the possibility of Marico entering into such an agreement with BOIL. The company had then denied any such move. The share price of Marico at the BSE had registered a phenomenal rise of 41 per cent during January 12 and February 3, 1999. The scrip started on its upward march from January 12, when it stood at Rs 352 per share to rise to Rs 499 per share on February 3. At that time, rumours doing the round were that Marico could be looking at getting into its fold the two brands from BOIL.

Terming the development as "good for Marico", an analysts said: ``The move will nevertheless put to restspeculation regarding the fate of the brands which the company did not own. Now that the brands will come under Marico, confidence levels will increase."

Parachute is the market leader in the coconut-oils segment with a share of about 54 per cent and Saffola is a leading brand in the refined oils in consumer packs segment with a 8 per cent market share.

Together, Parachute and Saffola clocked a turnover of Rs 335 crore, which contributes a massive chunk of 39 per cent to Marico's total revenues of Rs 553.1 crore in 1998-99.

The assignment of the brands to Marico would `perfect' the company's title to these brands and is expected to add to Marico's intrinsic strength. Not only will the assignment provide a tax shield through the depreciation which Marico can claim on the brands, the impact on earnings per share (EPS) is expected to be marginally positive, say analysts. EPS during 1998-99 was Rs 25.9 as compared to Rs 20.7 in the previous fiscal.

"Poison Pill" defence mechanism ends

Even asthe classic "Poison Pill" defence mechanism comes to an end making Marico vulnerable to a takeover threat, the promoters are comfortable that a higher stake in the company would act as a shield.

On its vulnerability to a takeover threat, Marico managing director Harsh Mariwala said, "Since the promoters' stake is quite high at the moment (64 per cent), there is no threat to the company or the brands."

Under the earlier lease arrangement enetered into with BOIL, Marico was protected from any takeover threat. For instance, if a predator were to acquire Marico it would not automatically acquire the two key brands (Parachute and Saffola), as these were under the ownership of BOIL.

BOIL was entitled to terminate this registered users agreement in the event of the shareholding of the Mariwala group in the company falling below 25 per cent of the paid-up capital at any point of time.

This acted like a "poison pill" for any takeover attempt on Marico as the main flagship brands belonged to BOIL. Further,Marico had the first right of refusal should BOIL wish to alienate itself from the ownership of the two brands.

The promoters hold 64 per cent in Marico and FIIs 17 per cent on a share capital of Rs 14.5 crore. Mariwala's holding in BOIL is also close to 64 per cent.

Insight

Good buy
In the Marico scrip, the market has finally got the news it was waiting for. The company now owns its brands, which should help in re-rating of the stock. Fundamentally, too the company will benefit from the acquisition of the brand, as it will be able to claim depreciation at a rate of 25 per cent. A point that has to be appreciated is that though the valuation was in the range of Rs 30-70 crore, the management has chosen to buy the brand at the lowest possible price, even though the temptation would have been to shell out more to its privately-held group company.

Shishir Asthana