Slump Sale Season!

Slump sale describes the sale of a business undertaking as a going concern basis on an AS-IS basis for a lump sum consideration without values being assigned to the individuals asset and liabilities. It's becoming a popular route nowadays for companies, and not so for shareholders.

Payaswini Upadhyay takes stock of some of the more recent transactions

In May last year, Piramal Healthcare sold to Abbott - via a slump sale- its domestic formulations business that contributed 55% of the company's revenues.  Abbott paid $3.72 billion or more than 10 times sales - proceeds that Piramal said it would use to retire debt, invest in the remaining business and new ventures. But many investors were not too pleased.

Atul Singhvi, Corporate Advisor & Ajay Piramal, Chairman, Piramal Group Interview to 'The Firm' on 4th June, 2010

Anil Singhvi, Corporate Advisor
We are getting Rs 850 approximately from Abbott for this transaction and still half the company is there. But shareholder hasn't got a single rupee out of this company. I completely buy the argument which Mr Piramal is giving that from Rs 6 crore to a journey of Rs 10,000 crore-but there is a value creation at Rs 10,000 crore but you have sold half of business for Rs 17,000 crore-what do I get? I am holding 1,000 shares of a Piramal Healthcare. What I get on this transaction?

Ajay Piramal, Chairman, Piramal Group
Our belief is that we as a management can create greater value for the shareholder if the money remains with us than it is in the hand of the shareholder and with us as promoters having the largest share a of holding, we would be very conscious that we have to create value, that's one thing. I have also said that we will definitely consider a special dividend.

Anil Singhvi, Corporate Advisor
But how long do I wait and I wait for what? Do I wait for dividend? Do I wait for new plans, which are going to be there or do I wait for something different because I invested in Piramal Healthcare. Now suppose if it gets into something else, I may not be interested but if I sell my shares today in the market-it's Rs 500 whereas the company has derived Rs 850.

Two months later in a much smaller, but similar transaction, Indo Asian Fusegear sold its switchgear business - 80% of revenues this one - to Legrand for Rs 600 crore and five months later.

PK Ranade, Joint MD, Indo Asian Fusegear Interview to CNBC TV18 on 25th October, 2010

Anchor
The point is that the stock price was Rs 160 when this deal took place and now it's come down to Rs 95. Obviously, there are some concerns. If you can give us a timeline on when do you plan to make some of these investments?

PK Ranade, Joint MD, Indo Asian Fusegear I would say we should start in about two-three months time because it has to be a carefully planned investment. We would not like to jump into something and then feel sorry later. I am sure the investors appreciate and understand.

In March this year, Smartlink was confronted with similar questions when it sold its structured cabling business for Rs 503 crore - the business was 90% of the company's revenue.

KR Naik, Executive Chairman, Smartlink Network Systems Interview to CNBC TV18 on 1st April 2011

Anchor
You were successful in selling that business at a 3.5 multiple of sales. Why is your minority shareholder not part of that upside today?

KR Naik, Executive Chairman, Smartlink Network Systems
Minority shareholders are still part of this. I have not taken anything out that is what I am telling.

Anchor
But how? That is cash left in the company which they have no access to. Are you committing that you will pay Rs 500 crore out in dividend?

KR Naik, Executive Chairman, Smartlink Network Systems
If I cannot do any other business with this.

Anchor
That is a judgment call whether you will do another business, whether you will be successful in that is your own judgment call. Why you are subjecting your minority shareholders to that?

KR Naik, Executive Chairman, Smartlink Network Systems
It is not own judgment. There is a full board here. It is not a one man show here. Do you think decisions are taken by individual person? You are asking questions as if I own everything here.

And then in April - Kanoria chemicals sold its chloro chemicals division - that contributed 70% of the company's total sales - to Aditya Birla Chemicals for Rs 830 crores. Another slump sale and another promoter defending the transaction.

NK Nolkha, CFO, Kanoria Chemicals In the case of slump sale, they (Aditya Birla Group) will get a hire Income Tax benefit and Kanoria Chemicals will need to necessarily pay for the capital gains tax. But had it been the other way round- the demerger- the tax incidence on them would have been higher. The deal value would have come down. So, in order to make it quicker and more efficient, we decided to go with the slump sale.

NK Nolkha, CFO, Kanoria Chemicals
Actually, we are trying to create more value for our shareholders by investing it again in various businesses. With this money, we can think of much bigger size businesses than what we could've thought of earlier because of high debts in the company's accounts.

This recent trend of slump sales has perturbed several investors - from retail investor Hinesh Doshi of the Investor Grievances Forum to Corporate Veteran and now investment advisor- Anil Singhvi

Anil Singhvi, Corporate Advisor
I feel that this slump sale actually originated for Income Tax and is being used now as a common business practice- which was an exception has now become a rule which is not really in favor of minority shareholders

Hinesh Doshi, VP, Investors' Grievances Forum
Slump sale doesn't involve any kind of regulatory approval except for shareholder approval which goes under Special Resolution. They take three-fourth majority of the shareholders and as you know, activism in India is not at its peak. Hardly minority shareholders attend those meetings. Even the postal allot nobody responds. With that, I think, the promoters decide the entire process of slump sale. The entire cash which is received- it lies in the company under their control.

Anil Singhvi,Corporate Advisor
Take an example of Kanoria Chemicals where they have sold a large part of their undertaking. This cash is going back to the company; it's not coming to the shareholders. Now suppose if I am a shareholder of Kanoria, what am I getting out of this transaction? Nothing. Company has got a huge pile of cash and do not even know what company is going to do. The same question I had for Mr Piramal when he sold large part of Piramal Healthcare and it has almost been a year- share hasn't moved an inch.

Hinesh Doshi, VP, Investors' Grievances Forum
Most of the companies which have sold, the stock price have gone down. Hardly there may be one case where the stock price has gone up because they are very excited that cash is going to come in the company. In fact, that's a very bad sign because the idle cash doesn't give good results. And after they have sold it, they have no plans as to where they will deploy the cash.

Anil Singhvi, Corporate Advisor
Amend the Clause 49 and make it that use of proceeds should be very clearly spelt out in the resolution for which you are seeking the shareholders approval for sale of undertaking.

And though minority shareholders get to vote against the transaction, it makes no difference, as the promoters vote is more than enough to push the slump sale resolution through. If only institutional investors spoke up - but they refused to even comment on this story - forget picking a shareholder battle - all 9 Mutual Funds that I approached turned my request down. So if the majority of the minority remains silent, minority can hardly be helped.