Hind Lever Chemicals Set To Merge With Tata Chem

Mumbai, January 22: | Updated: Jan 23 2003, 05:30am hrs
In a significant development which will give Tata Chemicals Ltd (TCL) a borrowing power of Rs 300-400 crore at a crucial juncture of National Fertilisers Ltd (NFL) coming up for disinvestment, Hind Lever Chemicals Ltd (HLCL) is being merged with TCL. Analysts estimate the share swap ratio to be in the range of 2.5-3:1 that is, 2.5-3 shares of TCL for every share of HLCL held.

HLCL is a subsidiary of FMCG major Hindustan Lever Ltd (HLL), and is into the business of fertilisers and bulk chemicals. The merger will give HLL an option of exiting the non-core business at a time when its power-brand strategy is at a critical trajectory of growth. However, since HLCLs bulk chemical sodium tripolyphosphate (STPP) forms an important ingredient for HLLs detergents business, the multinational will remain a strategic stakeholder in the merged entity, at least for the short term.

The total turnover of the merged entity will bloat to Rs 2,766 crore, making it one of the biggest fertiliser and chemical company in the country. In accordance with the scheme of amalgamation, HLL is expected to have its representatives on the board of the merged entity.

In separate notices to stock exchanges, the companies have informed that their respective boards will meet on January 24 to consider the merger proposal, subject to an in-principle approval of the said proposal, the share exchange ratio for the proposed merger, taking into account the recommendations of valuers, and the draft of the proposed Scheme of Arrangement for the merger of HLCL with TCL.

Reacting to the announcement, the TCL scrip jumped 9.81 per cent to close at Rs 66.60 on The Stock Exchange, Mumbai (BSE) on Wednesday, while the HLCL scrip closed at Rs 187, up Rs 17 over its previous days close.

Sources termed the move as pooling of businesses and resources rather than a merger or an amalgamation. The merger will yield sufficient exploration of synergies between the business interests of HLL and TCL, they added.

HLL had earlier announced its intention to exit non-core businesses, and was toying with the options of a possible sale or a joint venture for HLCL. STPP forms 90 per cent of HLLs detergent business consumption, and to keep a control over the price of STPP, HLL will retain some interest in the merged entity. There exists only two players in STPP, which makes the bulk chemical prone to cartelisation, and therefore outsourcing the ingredient is not advisable. Moreover, the Haldia facility of HLCL is well integrated with STPP, diammonium phosphate (DAP), sulphuric acid, among others. STPP also goes into diammonium phosphate (DAP) fertiliser and soda ash, which will fit well into TCLs business plan, said sources.

Retaining a presence in the fertiliser business will give a significant strength to HLL in the longer term, said sources. HLCLs fertiliser network provides sufficient impetus to the multinational, which has a near 50 per cent presence in rural markets. It will also assist HLL in the food- processing business, thus boosting its agri exports.

However, it did not make business sense for HLL to continue with the fertiliser business, which had achieved 100 per cent capacity expansion, and there was a need for consolidation. In the era of size and scale, it made sense to merge HLCL with a company that could provide the required thrust.

Financially, both HLCL and TCL are cash-rich. However, an unclear government policy on fertilisers, overcapacity in the soda-ash market and increasing competition in the branded salt market has led TCL to look at future avenues of growth. The merger of HLCL with the company will give it a borrowing power to the tune of Rs 300-400 crore, said sources.

TCL reported a 8.3 per cent increase in net profit to Rs 47 crore in the second quarter ended September 2002, and a 13 per cent increase in sales to Rs 439 crore. Urea, which contributes 45.9 per cent to the companys total revenues, is under government control and a lack of clarity in the fertiliser policy has been a contributing factor to the ambiguity.

HLCL reported a 47 per cent rise in net profit to Rs 7.40 crore in the second quarter ended September 2002, mainly due to higher topline growth and a sharp reduction in interest expenses. Total sales during the quarter rose by 11 per cent to Rs 300.59 crore. The companys accounting year was changed to April-March last year.

The promoters hold 29.85 per cent in TCL, out of which Tata Sons holds 10.14 per cent, Tata Investment Corporation holds 9.91 per cent, and the remaining 8.52 per cent is held by Tata Tea. Financial institutions hold around 26 per cent. HLCL is 50 per cent held by HLL, and institutional holding is at over 9 per cent.

As a conditionality to the merger proposal, HLCL is understood to have secured the interests of existing employees after the merger comes into effect, said sources.

In a press statement, TCL said: The proposal has been put forward to the respective boards. An announcement will be made subsequent to their decision. Tata Chemicals is continually identifying growth opportunities in areas related to its current businesses.

TCL, which is expected to bid again for NFL, was said to be in talks with a number of fertiliser companies for a suitable ally. Talks of a possible merger with own group company Rallis India were set aside after the latter severed the marketing arrangement with TCL. There were also talks of a possible tie-up with AV Birla group company Indo Gulf Corporation to jointly bid for NFL.