Merger vehicle in disputed territory
Entertainment biz on a roll

Mumbai, March 24: 
The two proposed mega-mergers � ICICI with ICICI Bank and Reliance Petroleum Ltd (RPL) with Reliance Industries (RIL) � may have spawned a banking behemoth and an oil oligarchy respectively, but it has also focused attention on an interesting concept of holding common shares in special purpose vehicles (SPVs) for subsequent sale.

The concept has been touted as a win-win for both the companies and its shareholders. But there is a small and influential ginger group within both the companies that is not entirely convinced about its effectiveness and question certain aspects behind the decision to set up the SPVs.

The proponents of the SPVs argue that its trust structure will significantly enhance the financial flexibilities of the two emerging titans besides providing additional means for non-recourse financing.

However, one fund manager affiliated to a leading mutual fund admitted that some investors were worried that the retention of the common shares in a corpus would create �an overhang of supply� and would not immediately translate into any real benefit for shareholders. The big question is really this: would it boost shareholder value to extinguish these shares now, or would it benefit them more if they waited for some strategic investor to come along at some later stage.

ICICI plans to spin off the SPV which holds 16 per cent of ICICI Bank shares for subsequent divestment. Ditto with Reliance which intends to create a Trust as a repository to hold 7.5 per cent stake of RIL shares for subsequent divestment.

The opponents of the SPV proposal would have preferred the commonly held shares owned by the two merged entities, be it ICICI-ICICI Bank or RIL-RPL to be extinguished. If the commonly held shares were to be extinguished, they argue that it will create a better value for the shares in the merged entity and, consequently, their holdings.

Analysts say the argument about the �overhang of supply� has arisen because investors are unsure of the price at which these shares will be divested. There is another factor to be considered: the possibility that the strategic investor or the financial institutions to whom the shares are hawked could at a later stage sell out at a profit.

Rubbish, say the proponents of the plan to create SPVs. They reckon that when the strategic investors express their intention to pick up a stake in the merged entity, there will be tremendous demand for the stock which will only benefit all existing shareholders.

They believe that in choosing such an innovative route, the two companies will gain immensely by divesting their equity at a subsequent date � a benefit that will accrue to the merged entities when they plough back the proceeds from the sale into their operations. If the shares were extinguished, this accrual benefit would also disappear. �It will also help their shareholders by improving valuations of the company,� said another analyst.

One may recall that the move to create the second largest bank in the country through the merger of ICICI Ltd with ICICI Bank Ltd got under way when a swap ratio of 2:1 (one share of ICICI Bank for two shares of ICICI) was fixed. It was also decided that ICICI�s holding in the merged entity would be divested through appropriate placement in 2003. While the proceeds will accrue to the merged entity. ICICI had then said that through this move, it is seeking to leverage on its shareholding instead of merely witnessing its holding getting cancelled under a scheme of amalgamation. Post-merger, ICICI�s 46 per cent holding (100 million shares) in ICICI Bank will come down to 16 per cent. This will be transferred to the SPV prior to the merger.

In almost a similar strategy, the Reliance group has decided to leverage on its holding consequent to the merger of RPL with RIL. It is planning to divest over 12 per cent of the post merger-equity capital of RIL to strategic and/or financial investors or use the same to purse significant acquisition opportunities particularly in the energy sector.

While announcing the merger, RIL had said that the Reliance group holds about 64 per cent of the equity capital in RPL at present. Of this, RIL holds 28 per cent and the remaining 36 per cent is held by Reliance Industrial Investments and Holdings (RIIHL), a 100 per cent subsidiary of RIL and other RIL associates holding the rest. Only, the RIL holding of 28 per cent will be cancelled.

Here, the 22 per cent RPL stake held by RIIHL, which constitutes 7.5 per cent of the fully diluted equity capital of RIL with a value of Rs 3,300 crore, will be directly issued and allotted to a trustee �to be held for the benefit of RIIHL and to realise economic value�. The stake of RIL associates that constitutes 4.7 per cent of the post-merger equity capital of RIL has a value of over Rs 2,100 crore.

For RIL, at stake is a value of a minimum Rs 5,400 crore which will arise by selling the stake to investors.


New Delhi, March 24: 
The Indian film industry is expected to grow at a scorching pace of 15 per cent a year, doubling its revenues within five years to Rs 5,000 crore. But the small screen is where the action is, with television revenues expected to grow two-and-a-half times to Rs 8,000 crore in the same period, according to a report on the entertainment industry prepared by Arthur Andersen India and Ficci.

The report says growth at the retail level will be fuelled by a chain of multiplexes, which are expected to revolutionise the cinema watching habits.

A strong drive against piracy, greater exports to NRI markets and availability of institutional finance will help professionalise and expand the film world, the study observes. It says major changes are likely to take place in the television industry, adding shake-outs among regional channels are expected.

Moreover, after a particularly lean 2001, a slew of channels are readying up for launch in the near future, the most prominent among them being �Manoranjan Aur Kya� and eight new channels from Eenadu TV. Walt Disney also plans to launch a 24-hour Hindi pay channel showcasing the Disney portfolio.

Standard entertainment will no longer be acceptable and channels will need programmes (such as Star TV�s money-spinner�Kaun Banega Crorepati) that create an identity for the channel.

While family politics is the order of the day�with Kyonki Saas Bhi Kabhi Bahu Thi and Kahani Ghar Ghar Ki from Star TV and Kkusum from Sony reigning supreme�the three main rivals, Star, Sony and Zee are trying out new formats to discover what genre will click next.


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