The ratio, which was announced by Aditya Birla group chairman Kumar Mangalam Birla, is as recommended by two independent valuation experts. The restructuring is effective from September 1, 1998.

Birla said that Indian Rayon shareholders stand to gain from the entire exercise, as for 37 per cent of Indian Rayon EBIDTA transferred, issue of Grasim shares translates into a gain of 39 per cent.

"The ratio is a fair valuation and strikes a balance in the interest of shareholders of both companies," he added.

Birla said the promoters will increase their stake in Grasim through open market purchases as per Sebi guidelines which allows promoters to hike their stake by two per cent every year.

The stake of the Birlasin Grasim will decline to 20 per cent from 22 per cent as a result of the cancellation of cross-holdings. "8.9 lakh shares arising out of cross-holdings of Indian Rayon in Grasim will be cancelled in the interest of enhancing shareholder value," Birla added.

Grasim, which now emerges as the country's third largest cement maker with a capacity of 10.6 million tonnes, will inherit Rs 437 crore of debt linked to Indian Rayon's cement business.

Grasim group executive president Mahesh Bagrodia will be in overall charge of the cement business. He will be supported by CP Jajoo, who will head manufacturing, and OP Puranmalka, head of marketing and strategy.

Birla said that a single brand umbrella will be created over the next three to five years. A special task force has already been created specially for the purpose which will advise on how to position the umbrella brand, and to phase out certain regional brands, if need be.

The synergy gains through the restructuring has been estimated at approximately Rs15-20 crore a year in the short term and potentially up to Rs 30-40 crore over the long term.

Birla stressed that excess manpower arising out of the consolidation will be fully absorbed in different divisions of the group. "Some may have to be relocated, but all will be absorbed. There are conflicts with the unions on this front," he added.

Birla is believed to be meeting the heads of UTI, LIC and GIC on Tuesday to make a presentation of the advantages that will accrue to the group and shareholders of individual companies as a result of the consolidation exercise.

The Aditya Birla group has been advised on the restructuring of its cement operations by the Boston Consulting Group. Bansi Mehta of Bansi Mehta & Co and Arun Gandhi of NM Raiji & Co were the independent valuers.

While DSP Merrill Lynch were the transaction advisors, Amarchand & Mangaldas and Suresh A Shroff were the legal advisors.

Birla said that Grasim will look at all avenues for expansion of its core businesses of viscose staplefibre, textiles and cement. "I believe that there will be a shakeout in VSF industry, and we will all possibilities. We will also look at further strengthening our cement operations as and when opportunities arise," he added.

"The cash-rich VSF business of Grasim could fund future expansion of cement operations. There is unlikely to be any major investment in VSF in the immediate future as its expansion is complete," Birla explained.

On the restructured Indian Rayon, Birla said that the company will continue to consolidate its core businesses viscose filament yarn, carbon black and insulators, "may be through brownfield expansions".

These three businesses have recorded a strong PBDIT growth of over 20 per cent over the last seven years. All three divisions have major export earnings and Birla said that Indian Rayon will strive to increase its international operations.

Under the restructured cement division, Grasim plans to do away with the old structure were each of the five cement divisions wereseparate profit centres and used to compete with each other on certain overlapping marketing zone, particularly in Maharashtra.

Indian Rayon shareholders will lose out

It is a great deal for Grasim, and should be reflected in its price. Indian Rayon shareholders are a major losers because the swap ratio of 3:10 will result in fall in Indian Rayon's stock price which will be greater than rise in Grasim's price. Cement, due to its locational advantage, was a cash cow for Indian Rayon, which is left with at least two divisions which have negative cash flows.

Sea-water magnesia plant had cost overrun of Rs 108 crore, and by the management's own admission will not generate returns for two years. The carbon black industry suffers from excess capacity and dumping, and hence this division will also not generate cash. The improved cash flow due to commissioning of bulk terminal will benefit Grasim. With equity of Indian Rayon being unchanged, RoE will be substantially lower. According to the figuresreleased by management, post spin-off, the margins of rayon for 1997-98 would have been better but 1997-98 was an excellent year for VFY and excatly the opposite is the case now.