Introduction:
Mergers:
One firm absorbs the assets and liabilities of the other firm in a merger. The acquiring firm retains its identity. In many cases, control is shared between the two management teams. Transactions were generally conducted on friendly terms.
Acquisition
Traditionally, the term describes a situation when a larger corporation purchases the assets or stock of a smaller corporation, while control remains exclusively with the larger corporation.
Governing Law:
The Companies Act, 1956 does not define the term 'Merger' or 'Amalgamation'. It deals with schemes of merger/ acquisition which are given in s.390-394 'A', 395,396 and 396 'A'.
Mergers & Acquisition Scenario in India:
The total M&A deals for the year during January-May 2007 have been287 with a value of US$ 47.37 billion. Of these, the total outboundcross border deals have been 102 with a value of US$ 28.19 billion, representing 59.5 per cent of the total M&A activity in India.
The total M&A deals for the period January-February 2007 have been 102 with a value of US$ 36.8 billion. Of these, the total outbound cross border deals have been 40 with a value of US$ 21 billion.
There were 111 M&A deals with a total value of about US$ 6.12 billion in March and April 2007. Of these, the number of outbound cross border deals was 32 with a value of US$ 3.41 billion.
There were 74 M&A deals with a total value of about US$ 4.37 billion in May 2007. Of these, the number of outbound cross border deals was 30 with a value of US$ 3.79 billion.
The sectors attracting investments by Corporate India include metals, pharmaceuticals, industrial goods, automotive components, beverages, cosmetics and energy in manufacturing; and mobile communications, software and financial services in services, with pharmaceuticals, construction, IT and energy being the prominent ones among these.
The Construction universe is expected to witness a top line growth of 28.4% YoY in Q3FY09E, mainly due to strong existing order book - IVRCL Infrastructure at Rs138bn, Nagarjuna Construction (NCC) at Rs128bn and Gammon India (GIL) at Rs73bn, with an order book-to-bill ratio of 3.7-2.8x FY08 turnover.
Talking about the recent mergers & acquisition in construction sector, we come across the merger of two construction companies i.e. Gammon India Limited (GIL) & Associated Transrail Structures Ltd (ATSL).
Gammon India Limited Merger With ATSL:
Gammon India has issued and allotted over 2.01 crore equity shares of Rs 2 each to the shareholders of the erstwhile Associated Transrail Structures (ATSL) as per the scheme of amalgamation between both.
The shares have been allotted in the ratio of 2:1 i.e. 2 equity shares of Rs 2 each of Gammon India for every 1 equity share of Rs 10 each ofATSL.
ATSL was merged with Gammon India effective from July 7, 2009.
The company had fixed September 3, 2009, as the record date for the purpose of ascertaining the eligibility of shareholders of ATSL who would be entitled to receive the shares of the company in the approved swap ratio.
The concept used: Amalgamation ( As ATSL is a small construction company which is being merged with a one of the biggest construction company Gammon India Limited, it shows the process of Amalgamation)
Type of Merger: The type of merger between Gammon & ATSL is Vertical Merger. As here in GIL is the civil construction company and ATSL is backed by its state-of-the-art design and quality manufacturing.
They basically belong to the Backward Merger as the GIL requires machines for the construction work and here the ATSL is helping him with production of the machine it requires.
Value Creation by Merger: The following synergies can emerge from this merger:
Gammon India Limited : Stand Alone Ratio Key Ratios
Gammon India Limited : Merged with ATSL Key Ratios
Derivatives of Stock Exchange Ratios:
Hence , we can see that the exchange Ratio is 2.04721 and Market Price of the ATSL has to be Rs. 344.4736
Note : Thus, the Amalgamation is worth it.
Conclusion:
Healthy order book provides revenue visibility:
Gammon India (Gammon) is in the process of merging with Associated Transrail Structures (ATSL), which is in the business of manufacturing transmission towers and laying transmission lines (Refer to Appendix 1 for details on ATSL and the industry). Gammon has an order book of Rs90 bn, while ATSL has an order book of around Rs18 bn. On a consolidated basis, the Rs108 bn order book provides revenue visibility for FY09E-10E.
ATSL to contribute 22-24% of consolidated revenue:
During FY08-10E, we expect standalone revenue CAGR of 30% each for Gammon and ATSL backed by their order books. On a consolidated basis, we anticipate Gammon's revenues to continue to contribute a lion's share and expect ATSL to contribute around 24% of revenues in FY09E and 22% in FY10E.
ATSL merger will improve EBITDA margins:
Given its line of business, ATSL's EBITDA margins are significantly higher than that of Gammon's. With the fixed-price contracts of Gammon's subsidiary company, Gammon Infrastructure Projects, accounting for 15-20% of its order book, we have factored in a margin decline of 100 bps for FY09E and FY10E vis-Ã vis 9.1% in FY08. ATSL's margins are also expected to be impacted by the higher steel prices resulting in a margin decline in FY09E. EBITDA margins of the consolidated entity will be 130-160 bps higher than the standalone entity during FY09E-10E.
Dilution offset by positive EPS accretion:
Gammon's board has approved the merger of ATSL with the company at a swap ratio of two shares of Gammon for every one share of ATSL. Gammon owned 22% stake in ATSL, but it is opting to hold treasury stock rather than extinguish the shares received in the merger process. The merger transaction implies a 29% equity dilution and indicates that ATSL has been acquired at a reasonable PE of 8.6x FY09E earnings and 6.3x FY10E earnings (assumes Gammon's share price of Rs212/share, the date the merger ratio was announced). This compares favourably with the multiples of ATSL's peers like Jyoti Structures, KEC International and Kalpataru Power, which were then trading at a PE of 10-12x FY09E earnings and 8-10x FY10E earnings. Despite the equity dilution, the merger is expected to be EPS accretive to the tune of 25-30% in FY09E and FY10E, even after factoring in interest cost of Sofinter's 50% stake for €50 mn.
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