Minority shareholders were apprehensive about valuations of the Indian power grid business of ABB India, which is now getting demerged as part of its parent’s global slump sell off and sold to Hitachi for $11 billion.
The reason behind this apprehension was that ABB is exiting the global power grid business at a valuation of one time its CY17 annual sales and 13 times earnings before interest and tax (EBIT), far lower than the Indian business, which is trading at 3.3 times CY18 estimated sales and 38 times EBIT. If the global benchmark is used, domestic investors would receive far lower proceeds than what is ascribed by the market.
Thankfully, ABB India is now curving out this domestic transmission and distribution (T&D) business into a separate entity. Currently, promoters hold 75 percent in ABB India, while the rest is owned by the public. The demerged entity will mirror the existing shareholding of ABB India. After the demerger, existing promoter stake will go to Hitachi, whereas minority shareholders will be issued one share of the demerged entity for every five shares held in ABB India.
As the management would seek to list this demerged company, the value will be determined by the market. While the rational for the swap ratio is still missing, the idea should be to maintain or create value for minority shareholders. The sum total of the shares after demerger should be equal to or higher compared to the current value of existing shares.
ABB India’s power grid business accounts for about 40 percent of its revenue and 30 percent of EBIT. It reported a sales turnover of Rs 4,222 crore and an EBIT of Rs 422 crore in CY18.
Investors will weigh both the companies separately. ABB India is currently valued at 40 times its CY19 estimated earnings. That is on a higher side and reflect its technological edge and product profile, which may not reflect in the case of power grid business. Thus, the power grid business may get a lower valuation multiple, which seems to be reflect in the swap ratio and which favours the remaining business. This also means that investors should not expect a cash payout or a one-time dividend as expected by most earlier.