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Bajaj split brings gain & pain

Mumbai, May 17: Two-wheeler giant Bajaj Auto is finally breaking up by spinning off its auto and financial services businesses, four years after the idea was first floated.

The demerger will lead to the creation of two new entities.

Bajaj Auto’s investment in the financial services business will be transferred to a new outfit called Bajaj Finserv Ltd.

The demerger will create three separate entities. The first is a company that will focus only on its auto business; the second will hold investments in financial services business, including Bajaj Auto Finance Ltd (BFL) and the twin insurance companies — Bajaj Allianz Life Insurance Company and Bajaj Allianz General Insurance Company. It will also incorporate a wind power project, which is now part of Bajaj Auto.

There will be a third company called Bajaj Holdings and Investment Ltd (Bhil) which will hold shares in the new companies in addition to the group’s investments in ICICI Bank.

The complex demerger process will see existing shareholders of Bajaj Auto getting one share each in the new companies formed. To begin with, the existing Bajaj Auto will be renamed as Bhil (the new primary investment company).

Subsequently, shareholders will be allotted one share in the new Bajaj Auto Ltd and one share in BFL.

Briefing reporters after the company’s board cleared the proposal, Rahul Bajaj, chairman and managing director of Bajaj Auto, said the demerger would enable these entities to focus on their core businesses and strengthen competencies.

The shareholder will gain as the demerger will unlock the value of his current holding — in much the same way that the Reliance demerger enriched shareholders after the breakup in early 2006.

Speculation had been rife that the demerger was taking place because Rahul’s sons — Rajiv and Sanjiv— were unable to work together any longer.

Bajaj scoffed at the suggestion today. He said there would be no change in the management structure particularly in the auto company. Rajiv Bajaj would continue as managing director and CEO while brother Sanjiv would continue as executive director. Sanjiv would also be responsible for BFL.

Bajaj Auto now has a Rs 8,500-crore cash chest. Of this, a sum of Rs 1,500 crore will go to the two-wheeler maker and Rs 800 crore will be transferred to BFL. The rest will remain with Bhil.

Analysts were worried that the two-wheeler maker was going to get just Rs 1,500 crore. However, Bajaj didn’t see this as a major issue. He reckoned that the auto business would be in a position to generate fresh cash of at least Rs 800 crore a year.

Stock plunge

Although analysts saw the demerger as a positive move, the Bajaj Auto stock was hammered on the bourses today. On the NSE, the share ended at Rs 2503.90, a fall of 6.59 per cent as against the previous close of Rs 2680.60.

Observers say the market was unnerved by the prospect of foreign partner Allianz calling the shots at the insurance ventures if the government raised the limit on foreign investment in the sector, which is currently capped at 26 per cent.

Bajaj Auto today revealed there were call options in favour of the foreign partner while it held a put option. These options will permit Allianz to increase its stake to 50 per cent in the general insurance venture and 74 per cent in the life insurance outfit if the government permits such an increase.

Allianz’s purchase price will depend on when it gets to exercise its call option. For options exercised until April 22, 2016, in the general insurance venture, Allianz will have to pay Rs 10 per share plus interest compounded at 16 per cent annually from April 23, 2001 to the date of payment.

For call options exercised after April 22, 2016, Allianz will have to pay the highest among the previous pricing formula — market price of the shares if the company is listed or a “fair value” if the company is not listed. A similar agreement also applies to the pricing arrangement for the life insurance venture, though each share will initially cost Rs 5.42 plus interest.

Fourth-quarter result

Bajaj Auto announced its fourth quarter results today which came as a disappointment.

Net profit for the fourth quarter ended March 31, 2007 fell to Rs 308.28 crore compared with Rs 321.79 crore in the year-ago period.

Net sales of the company fell to Rs 2313.55 crore compared with Rs 2165.86 crore in the same quarter last year.

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