The proposed merger will complete the consolidation of the DRL group into a single entity, even as country's leading drugs innovator readies for its ADR issue later this year. DRL had recently finalised the amalgamation of American Remedies Ltd (ARL) with itself at a swap ratio of 1:12-one share of DRL for 12 shares of ARL.

Says an analyst with Inquire equity research, "We expect the DRL-Cheminor merger ratio to be in the region of 1:3 and 1:4, though valuations based on pure book values indicate a ratio of 1:2. It is good that the merger is being mooted prior to the ADR or else it may have been tilted the balance in DRL's favour".

An analyst with the Mumbai-based Birla Sun Life Securities said, "Being part of the same group, it makes business sense for the Reddy's group to consolidate operations prior to the ADR". Market rumours suggest a 1:2 swap, the analyst added.

Analysts also expect the Reddy's group to control 36-39 per cent of the equity capital in the merged entity, even as Schien Pharma which held 18.04 per cent of Cheminor's equity will hold a small stake in the combined company.

PricewaterhouseCoopers (PwC) is believed to be involved in the valuation exercise for the proposed DRL-Cheminor Drugs merger, though market sources say that KPMG may also have a role to play. No official confirmation could, however, be got from the Hyderabad-based DRL.

Says Arun Kejriwal from Nikko Stock Brokers Pvt Ltd, "The proposed merger will mean an increase in the overall market capitalisation prior to the ADR. It will also do away with any confusion on the group's holding in the two listed entities. The swap is likely to be related to the market price".

The DRL scrip was moving in the range of Rs 1,300 and Rs 1,345 while the Cheminor stock was moving in the region of Rs 331 and Rs 385, in the recent past. The DRL scrip closed at Rs 1317 while the Cheminor stock closed at Rs 410 on the BSE on Monday.