Strides and Sequent announced the scheme of arrangement for the spin- off of the human API businesses of the two companies. Under the agreement Strides shareholders will own 60% of the new company. Under the scheme, Strides shareholders will get 1 share of SSL for every 6 shares of Strides while Sequent shareholders will get 1 share of SSL for 25 shares of Sequent. SSL will have revenues of c9.5bn rupee annual run-rate with 68% contributed by Strides API. The entity will also have debt of R5 billion.
Of this R4.25 billion is from Strides (total Strides net debt of R20.7bn). The margin of the company will be c10%. The appointed date of demerger will be October 1, 2017. We believe that the spin- off of the API business is a positive as it allows Strides management to focus on the key B2C businesses across geographies.
The spin-off though will delay the backward integration for key business (US, Institutional and Australia). Strides is trading at c20x FY18 PE, inline with sector. We continue to like the B2C businesses in US, Australia and Africa and believe it will generate significant value over the medium term.
Near-term earnings though will be impacted due to restructuring. Also, the integration benefits will likely take longer than our earlier estimates. Retain Hold with TP of R1,300, based on 16x FY19E PE, in line with our mid-teens valuation for the sector. Key risk: approval delays.