After falling as low as R155.40, down 7.8%, the scrip recovered to end the session at R164.2, down 2.55%. Trading interest on the counter remained high. At 7.69 lakh shares, volume more than doubled from last two week’s average of 3 lakh shares.
Avantha announced its decision to sell its 34.37% stake in the consumer products business currently housed in Crompton Greaves Consumer Electricals (CGCEL), a de-merged wholly-owned subsidy, for an aggregate consideration of R2,000 crore.
As per the press release, the transaction values CGCEL at an enterprise value of R6,600 crore, 17 times its Ebitda for fiscal 2013-14. However, the valuation appears short of analyst expectations and may have been the reason behind sharp selling of Crompton Greaves stocks on Friday. As per the announced transaction value for the Avantha stake sale ( R2,000 crore), CGCEL is valued at R5,819 crore.
In a research report dated April 19, JPMorgan said its viewed such a potential deal at or above equity valuation of R7,000 crore for the entire consumer business as an upside risk for the Crompton Greaves stock. Its expected deal value implied 22 times the profit after tax of the segment for FY15.
The foreign brokerage also said that in the event of acquirers targeting higher –- more than 50% — stake of the consumer products business, “the minority investors will benefit from the control premium… and the valuation established on current promoter exit will just establish a floor price”.
According to the press release, after its de-merger into a standalone company and subsequent listing on stock exchanges (NSE and BSE), Advent and Tamasek “will make an open offer for additional shares of CGCEL in compliance with takeover regulations”. The transaction is expected concluded in the first quarter of 2016.
The consumer products segment accounted for 21% of the consolidated revenue and 33% of the operating income of Crompton Greaves in FY14, as per Bloomberg data.
After the de-merger of the business, Crompton Greaves’ consolidated numbers will reflect its business interest in power systems and industrial systems segments and its overseas subsidiaries. The Crompton stock has underperformed the market in the last one year; while the Sensex has yielded close to 21% it lost 7% of its value. In 2015 so far, Crompton Greaves has lost more than 12% of its value even as the benchmark traded flat. The Street continues to look at a dismal order backlog and lower margins as factors that weigh on the stock’s performance.