Financial Bulletin- January 2019 Edition

MONEY MATTERS CLUB Presents… January 2019, Edition

The Financial Bulletin

FROM THE EDITORS

The Financial Bulletin Money Matters Club IBS, Hyderabad Est..—2005

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In this issue, we bring to you the much talked about mergers and acquisitions engulfing the global economy at large.

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HPCL Acquisition by ONGC Introduction to the Terminology : An Acquisition is a business situation where one company takes over a significant portion of the equity share capital of another company thereby expanding its market reach and taking control over the operating decisions of the acquired company. Often people tend to relate acquisition and merger synonymously, however, on a purely technical basis, a merger includes the amalgamation of two companies whereby a resultant new company is established.

However, in case of an acquisition, no new company is formed. The assets and liabilities of the acquired company just become a part of the larger (acquirer) company.

There are many reasons why companies prefer a merger or acquisition. The most popular of them is to create Synergies. It is defined by the equation 2+2=5.

When two companies merge, it is not only a mere merging of the existing capabilities of the two companies together. Rather it also leads to creation of additional benefits which would not have been possible had the merger/ acquisition not taken place. Apart from this reason, there are reasons like availing the benefit of diversification of product line, more market power, rapid growth etc. which form the basis of any merger or acquisition.

Background of the Topic : Our topic in hand is in regard to the much talked about acquisition of HPCL (Hindustan Petroleum) by ONGC (Oil and Natural Gas Corporation). ONGC completed the acquisition of a controlling stake (at least 50% of the equity share capital) in HPCL on 1st February 2018(agreement for acquisition being made on 20th January 2018) .The news of this acquisition was very much anticipated on account of the speech of the Finance Minister Arun Jaitley at the year 2017 Budget proposal whereby he laid stress on his intention to consolidate oil and gas Public Sector Undertakings.

Features of this Acquisition : 

The acquisition was worth Rs.36,915 crores (778,845,375 equity shares at Rs.473.97 per share) and the liability was settled by ONGC in cash/by bank fully.

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This acquisition transferred ownership of 51.11 % of the ownership in HPCL from the hands of President of India to ONGC. ONGC contracted along with 7 banks for the purpose of funding this acquisition to the tune of Rs.35,000 crores. The details in regard to remaining Rs.1,915 crores are not accessible to the public. The acquisition was at a premium of 14 % over the closing share price of HPCL as on 19 th January 2018.

The combined value post-acquisition is estimated to be around Rs.3120 billion.

Reasons for the Acquisition : This acquisition will put ONGC in a competitive position such that it will be able to stand neck to neck with many affluent International oil companies. It can showcase a very strong balance sheet which is a representative of alluring financial position and smooth flow of earnings in the organisation. Also, the acquisition would put ONGC in a favourable power position such that it can acquire new oil fields to carry on its operations. Another reason is that a consolidated oil company is in much favourable position to handle the neverending fluctuations in the crude oil market.

Impact of Acquisition : Post the news of acquisition, the share prices of ONGC increased by 3.28% (Rs.200.70/share) while the prices of HPCL fell by 3.55%(Rs.410.80/share) on the very next trading day. The Sensex saw a surge to the extent of 0.81%.

The marginal increase in share price of ONGC was because the stakeholders were unable to understand the implications of the acquisition by ONGC.

By: Bhavesh Gandhi

Flipkart Walmart Deal Background : Flipkart is now a subsidiary of US Retail major Walmart. Walmart has acquired a 77 percent stake in India’s largest home-grown e-retailer on 9th May 2018. The remainder of the business will be held by Co-Founder Binny Bansal, Tencent Holdings, Tiger Global Management and Microsoft. Following the deal, Walmart and Flipkart will continue to operate as separate entities The US retail major has spent about $16 billion to acquire a majority stake in the 10-year-old Indian ecommerce firm. Of this, $2 billion is the actual investment in the company. The rest of the money is used to buy other stakeholders.

Why has Walmart invested $16bn in Flipkart?

Amazon is a leading e-commerce portal and Walmart wants to compete against it online and in fact, wants to stay ahead of Amazon. India is the only place Walmart could look at for its dream after China because the scope of development in India is much more than any other country for its size and growth rate.

Also, the customer base for Flipkart is more than Amazon India and Flipkart is growing rapidly every year and for fiscal year ending 2018, the annual GMV (gross merchandise volume) was $7.5 billion, representing 50% year-on-year growth.

What Flipkart gains?

The company will become a part of global giant. This will give a boost to the business of Flipkart in India. Also, Walmart has proficiency in retail management and will give Flipkart an edge over its competitor. Flipkart will get access to newer markets including in developed countries because of existence of Walmart. The infusion of fresh funds will help Flipkart expand its operations and revenue. After Walmart’s investment, Flipkart is valued at around $20.8bn.

What the consumers gain?

The intense competition in the market could be advantageous to the consumer, greater innovations and ideas will lead to improved products and services.

Walmart whose strength lies in its direct sourcing will help to decrease costs and hence bring down prices of products.

Walmart will also invest in infrastructures like warehouses, communication channel, technology and delivery solutions that will help in increasing reach, faster delivery of goods and consumer satisfaction. Exclusive deals with global brands which aren't available in India will offer Indian consumers a wider base of international goods than what is being now offered.

What the employees gain?

Flipkart employees can now expect larger payback in the form of employee stock options as a result of the company's valuation increasing from $11 billion to $20 billion. There will also be better career growth for employees.

Effect on the e-commerce sector : The combined Walmart-Flipkart company will have a massive 90 % share of the e-commerce market in India. And that increases the fear of loss of business of traders, sellers and retailers since Walmart could bring multiple products to India and flood the e-commerce platform with its own products. These small retailers had even approached the Competition Commission of India with the appeal that foreign direct investment (FDI) norms were being violated by this deal. Walmart's main rival and one of the market leaders in India, Amazon sees the merger as a risk and had even offered a rival deal to Flipkart.

By: Ayushi Jindal

Acquisition of Costa Coffee by Coca Cola Background: The management at Coca-Cola stated that their vision is to use costa’s platform to expand in the growing coffee consuming customer segment. The coco-cola company has completed its acquisition of costa Limited from Whitbread PLC valued at $5.1 billion which was founded in London in 1971 and has grown to become a major coffee brand across the world. This acquisition will Give CocaCola a Strong, Global Coffee Platform with a Footprint in More than 30 Countries and Potential for future Growth & opportunities for expansion of Costa Brand in multiple channels and formats. Supply Chain in regard to the coffee sector includes sourcing, vending and distribution. Coca Cola can develop an economy of scale in this aspect post-acquisition. This will be a complement to existing capabilities within the Coca-Cola system.

Reasons behind Acquisition:  Further diversity away from sugary carbonates Coke focuses on health and functionality as soda drinks, whether sugary or made with sweeteners, loose flavors with shoppers. It’s a big deal for Coca-Cola and a strategic play to further expand beyond soft drinks and move into the growth of coffee and hot drinks beverages which in turn helps their customers.  Stake in a fast-growing market Coffee is one of the fastest-growing beverage categories in the world It is also a category with many different elements, from vending to coffee shops to roastand-ground to instant to pods and capsules.  Global reach The deal with Costa is beneficial as the coffee shop chain is determined to realize its strong potential overseas. The combination of a Globally recognized brand and the United Kingdom’s biggest coffee chain will ensure continued product development, greater market share and potentially enormous and rapid growth expansion overseas.  Direct route to the high street As Coke currently does not have any coffee outlets in its arsenal it’s an opportunity for the business to plug that gap and tap into this growing market.

For Coke, acquisition would extend its presence in the coffee and restaurant space. For Costa, the deal will accelerate its position in ready-to-drink beverages through Coca-Cola’s distribution channels.

Cost savings For Coca-Cola, the addition of Costa will bring with its strong economies of scale across the coffee supply chain. It will also generate significant synergies to boost Costa’s profitability. 

By: Mahima Jaiswal

Merger of Bharti Infratel and Indus Towers About Bharti Infratel Bharti Infratel is amongst India’s leading suppliers of towers and other related infrastructure. It deploys, owns and also manages telecom towers and communication structures, for many different mobile operators. The company’s consolidated portfolio of more than 91,000 telecom towers, includes over 39,000 of its own towers and the balance from its 42nd equity interest in Indus Towers, makes it one of the hugest tower infrastructure suppliers within the country with presence in all 22 telecom circles.

About Indus Tower Indus Towers limited is an independently managed company providing passive infrastructure services to almost all telecom operators. Founded in 2007, Indus Towers Limited has been promoted under a joint venture among entities of Bharti Group, Vodafone Group, and Aditya Birla Group, who created history by collaborating to share telecom infrastructure. Indus Towers has a presence within the 15 major telecom circles of India and has achieved 278,408 tenancies, a first in the telecom tower industry globally.

Why the Merger?

Bharti Airtel, Vodafone India Ltd., and Idea Cellular Ltd. have been wanting to cut their stake in tower businesses to fund core operations. That’s because their earnings are under pressure ever since Mukesh Ambani’s Reliance Jio Infocomm Ltd. unleashed a tariff war.

Bharti Airtel has up to now sold 18.5 percent stake in Bharti Infratel in different tranches for close to Rs 12,000 crore.

The merger of Bharti Infratel and Indus Towers can help unlock value and supply idea Cellular an exit. Vodafone group will have the choice to sell its shares in the open market within the future.

Features of the Merger 

The Merger Ratio of 1,565 shares of Bharti Infratel for every 1 Indus Towers share is within the range recommended by the independent valuer. Based on the SEBI rating guidelines for Bharti Infratel, in regard to the proposed

scheme, as at 23 April 2018 (INR363 per share), the Merger ratio implies an enterprise value for Indus Towers of INR715bn (US$10.8bn) 

The combination of Bharti Infratel and Indus Towers by way of the merger will create a pan-India tower company, with over 163,000 towers, operating across all 22 telecom service areas in India. The combined companies are the biggest tower company within the world outside China.

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The combined company, which will fully own the respective businesses of Bharti Infratel and Indus Towers, will change its name to Indus Towers Limited and will continue to be listed on the Indian Stock Exchanges.

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The combination of the two companies’ highly complementary footprints will create a tower operator with the ability to offer the high quality shared passive infrastructure services needed to support the pan-India growth of wireless broadband services using 4G/4G+/5G technologies for the advantage of Indian customers and businesses.

Conditions to Completion The merger to create the biggest tower firm in India is awaiting regulatory approvals from National Company Law Tribunal (NCLT) and also the telecom department. It is expected to complete in the first quarter of the new financial year, starting April 1, 2019.

By: Prachi Chande

General Mills and Blue Buffalo Merger Background : General Mills, headquartered in Minneapolis, Minnesota, USA, is a leading global food company that serves the world by making food people love. Blue Buffalo, based in Wilton, is a leading natural pet food company, providing natural foods and treats for dogs and cats under its BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom and BLUE Natural Veterinary Diet lines.

On April 24,2018 General mills completed the acquisition of pet food company Blue Buffalo for about $8 billion for which company agreed to pay $40 per share in cash, this represented more than 17% premium on Blue Buffalo share. The reason for the acquisition was to overcome the counter declining sales of sugary, processed foods and to diversify its portfolio in fast growing pet food market.

The acquisition :

The acquisition has been funded with debt, cash in hand and about $1 billion in equity. For Blue Buffalo, the acquisition marked the peak of an amazing rise with just 16 years of its establishment.

The addition of Blue Buffalo establishes General Mills as a leader in the wholesome natural pet food category, the fastest growing portion of the $30 billion U.S. pet food market, and hastens the company's portfolio reforming strategy.

The Graph suggests that, over the past 18 months despite of the stock market's bull run, General Mills faced lack of revenue growth, but on the other hand, Blue Buffalo's anticipated $1.39 billion in revenues in 2018 which might seem like a small number in comparison to General Mills' $15.7 billion, but on a reported basis it showed continuous growth.

The future : Blue Buffalo should be able to gain greater diffusion in FMC with General Mills than they would have without them. General mills order management systems, technological capabilities and overall logistics are vastly superior to Blues, and therefore few years down the road assuming more profitable Blue Buffalo portfolio (25% adjusted EBITDA margin) could be benefited from General Mills' robust distribution channel and the top-line benefits could be helping to finally push EPS growth beyond the 10% mark.

By: Aashita Jhawar

Vodafone Hutchison Merger Background : Vodafone Essar, earlier Hutchison Essar is a cellular operator in India that covers 23 telecom circles in India. Despite the official name being Vodafone Essar, its products are branded “Vodafone”. It offers both prepaid and post-paid GSM cellular phone coverage throughout India with good presence in the metros.

Vodafone Essar provides 4G services based on 900 MHz and 1800 MHz digital GSM technology, offering voice and data services in 23 of the country’s 23 license areas. It is among the top three GSM mobile operators of India.

The acquisition : On February 11, 2007, Vodafone agreed to acquire the controlling interest of 67% held by CGP investment holdings in Hutch-Essar for US$11.1 billion, pipping Reliance Communications, Hinduja Group, and Essar Group, which is the owner of the remaining 33%. The whole company was valued at USD 18.8 billion. The transaction closed on May 8, 2007.

Vodafone- entry in the Indian market : Vodafone had two ways to enter into the Indian market:  

By making a set-up of their own.

By acquiring an existing company and earn profit out of it.

Vodafone chose the other option, which was by acquiring any existing player by a motive to earn profit out of it.

The Hutchison Essar Company was already established in India and according to Indian Tax Department when an entity earns or sells that is of India, the acquiring company has to pay the tax on the merger. Vodafone had an idea that if it acquires Hutch, then it had to pay the tax amount that was almost one fourth of the total company (Hutchison Essar). To avoid tax payment, Hutch and Vodafone prepared a plan and came up with an idea of making a separate entity in a country that is tax free.

So, they planned to set up a company called CGP Investment Holdings in tax heaven area which was Cayman Islands which had 67% of total holding of Hutchison Essar Private Limited. Vodafone then acquired CGP holdings and then indirectly acquired Hutchison Essar in India.

Seeing to this government of India filed a case in Bombay High Court against Vodafone and won the case, but then Vodafone approached Supreme Court, where government lost it as there was no law existed for such conditions.

Taking an advantage of the loophole in law, Vodafone saved itself against the taxable amount.

The case is still pending with Vodafone heading with an advantage.

By: Vishal Agarwal

Acquisition of Fox by Disney Acquisition : As one empire grows the other sinks. On 27th July 2018, at the Hilton Hotel in Midtown Manhattan, shareholders of the Walt Disney Company and 21st Century Fox agreed to a $71.3 billion purchase plan that gives Disney the majority of Rupert Murdoch’s media empire, substantially altering the entertainment landscape.

Though the deal has not been finalised and is ready to take place in early 2019, movies like “Avatar,” the “X-Men” movies, “Titanic” and TV shows such as “The Simpsons” and “This Is Us” will now be owned by Disney. The deal would also give Disney the cable networks FX and National Geographic; a controlling stake in the streaming service Hulu, which has more than 20 million subscribers; and Star, one of India’s fastest growing media companies.

The deal : To gain control of Fox, Disney’s chief executive, Robert A. Iger had to fend off an aggressive play by Comcast. Mr. Iger and Mr. Murdoch originally agreed to a deal in December. After months of manoeuvring, Comcast, the Philadelphiabased cable giant, topped Disney’s original bid in June, but Mr. Iger returned almost immediately with a better offer that had a mixture of both cash and stock to which the board of Fox and Mr. Murdoch accepted.

At first, the deal was for $52.4 billion but later increased to $71.3.

In July the acquisition was voted by the shareholder of both Fox and Disney and was sent for preliminary approval with the U.S. Department of Justice earlier in the summer. In doing so, the process to incorporate Fox's assets into Disney officially got its much-needed start. Generally, it takes about 18 months for the acquisition to be completely over.

The main reason for Disney buying Fox is to have additional branded content for online, direct-to-consumer content services.

“This acquisition reflects a changing media landscape increasingly defined by transformative technology and evolving consumer expectations,” said Disney CEO Bob Iger during a conference meeting.

Impact of merger :

Disney currently owns a 30% stake in Hulu, which would increase to 60% after the acquisition. The merger will also bring 22 regional sport channels under the belt of Disney.

Disney will gain a large list of superheroes under them. Fox has had varying degrees of filmmaking success with these characters, from box office hits like Deadpool and Logan, to cinematic failures like The Fantastic Four, Daredevil, and Elektra.

Increasing International Grip :

Disney and Fox have been working to gain the necessary regulatory approvals worldwide for the past six months and have invested considerate amount of time and effort into the process.

In a conference Iger had mentioned the international benefits of the combined global entertainment company, seeing particular opportunities in Europe, India, and Latin America, which were the two specific assets in the portfolio: Sky, which has been called the "crown jewel" of European cable television, and Star India, which boasts 700 million customers. Sky would bring 23 million subscribers via its cable and over-the-top services. Star India has 61 channels, as well as two dedicated streaming services under the banner Hotstar, which hosts another 150 million subscribers. Star's combination of cable and streaming reaches 90% of Indian households.

By : Atul Shah

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