BackShareholders miss windfall on Wilmar’s Shree Renuka stake buy
Wilmar's confidence in Shree Renuka's future is a leap of faith at a time when domestic sugar firms are not performing well
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Wilmar International Ltd’s investment in Shree Renuka Sugars Ltd ticks the right boxes, but not quite to the satisfaction of its minority shareholders, it would appear. The company’s share fell by 6.2% on Friday, reacting to the news of Wilmar’s acquisition. What could have upset shareholders?
After all, Wilmar is a reputed multinational company in the agricultural commodity market and its capital infusion will strengthen Shree Renuka’s balance sheet. Wilmar’s confidence in Shree Renuka’s future should be a comforting factor. It is a leap of faith at a time when domestic sugar companies are not performing well and international sugar prices too are ruling weak.
One reason for the stock’s reaction could be the acquisition price. Wilmar’s preferential equity investment will be at ₹ 20.08 a share, and the mandatory open offer is at ₹ 21.89 a share, while the market price prior to the announcement was ₹ 21.1. That leaves little upside for investors. They may have expected Wilmar to pay a premium to get joint control of Shree Renuka for its 27.5% stake.
Another aspect is the level of equity dilution in store due to the preferential issue of ₹ 517 crore and a proposed rights issue of ₹ 725 crore. These together will result in Shree Renuka’s equity capital rising by 92%. That is a sizeable equity dilution.
But that equity infusion has its uses. Based on Shree Renuka’s debt level of ₹ 6,547 crore on 31 March, the company’s debt-to-equity ratio is 6.1 times. This declines notionally to 2.4 times if we consider the expanded equity base.
But this ratio is likely to have worsened in 2013-14 as the Indian operation has incurred losses and weak international prices are likely to have hurt its Brazilian operations’ performance too. The figures will become available once the consolidated full-year results are declared.
Now, the equity infusion will be used to partly repay its domestic debt of ₹ 2,603 crore as on 30 September. But the consolidated debt will still remain high and the interest on that will continue to hurt the company’s earnings, although to a lower extent.
Next on its agenda has to be a lowering of debt on its Brazilian subsidiaries’ books. One option is by selling some assets. Another option is if Wilmar at some stage considers a direct investment in these subsidiaries. That money can be used by them to repay their loans.
That can further strengthen Shree Renuka’s balance sheet and also lower interest costs. And it could give Wilmar more control over the Brazilian operations, but without diluting the Indian promoter’s stake in the holding company. Perhaps the current transaction may then make more sense to minority shareholders. For now, they may continue to wonder why the promoters allowed Wilmar to take joint control without paying a sizeable premium to the current market price.
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