New Delhi, Feb 13: Calculating the swap ratio in the proposed merger of Pond's India with Hindustan Lever Limited could be a futile exercise in view of the excessive speculation on the bourses. Estimates of the swap ratio on the basis of the available book value, average market price and future earning prospects is likely to be 7:5 i.e., five shares of HLL for every seven shares held of Pond's.But speculative activity is already building in the HLL counter as witnessed on Friday when covering at the concluding session of the day saw the scrip posting major gains. Pond's did not, however, record any big gains unlike Thursday's trading. Since the merger proposal is at a preliminary stage, speculation can tilt the balance in favour or against one of the two scrips. On the other hand, brokers point out that both the scrips will move in tandem, evening out any possibility of price distortion.
Pond's book value has come down after the 1:1 bonus issue (which followed the preferential allotment to Unilever) toRs 69.94 as against Rs 84.08 earlier. ON the other hand, HLL's book value is approximately Rs 62.37. Going by the current market price of Pond's and HLL (Rs 1,000 and Rs 1,390), respectively, and their profitability ratios, the swap ratio for the merger could be 5 HLL shares for 7 shares of Pond's.
The share capital of HLL will, thus, increase to Rs 223 crore including the preferential allotments to Unilever. And, the merger will also help HLL improve its leverage ratios. For instance, as Pond's is a zero-debt company, the debt-equity ratio of HLL will become 0.20 compared with 0.26 at present. For the year ended December 31, 1997, Pond's net interest income stood at Rs 2.57 crore while HLL's interest outgo was Rs 33.9 crore.
If one considers the return on networth (RONW), it is higher for HLL at 44.45 per cent against Pond's 29.26 per cent (which has come down after the recent bonus issue). Because of the increase in equity, Pond's return on equity is now lower than HLL's.
The market has largelydiscounted the merger between the two if the share price trends are any indication. Ever since the joint venture between Lakme and HLL was announced in 1996, theories of the HLL-Pond's merger have been floating in the market. Further developments like the clearance of the preferential offer of equity to Unilever during June 1997 and the 1:1 bonus from Pond's only strengthened the merger theory. The result: The scrip prices of both HLL and Pond's more than doubled during the eight-month period from January 1997 to August 1997. The Pond's scrip rose steadily from Rs 847 on January 1 to Rs 2036 on August 5, while the HLL scrip rose from Rs 817 to Rs 1559 during the same period. Following the 1:1 bonus from Pond's, the scrip price was adjusted downward to around Rs 900-1000.
In spite of the sharp fall in the market over the last four to five months, these scrips managed to hold on to their gains, shedding very little. This is because of the market expectation that the merger announcement would coincide with theresults announcement. Thursday's announcement is a confirmation of the market belief, based on which the two were discounted largely. Now, with the cat is out of the bag, speculation will centre around the swap ratio.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
