Shares of Butterfly Gandhimathi Appliances got mired and closed 4.71% lower at ₹ 1215.00 apiece on Monday after the company announced a merger with Crompton Greaves Consumer Electricals. Meanwhile, the shares of Crompton Greaves Consumer Electricals closed 0.46% higher at ₹ 295.10 apiece.
According to the proposed scheme of merger, the public shareholders of Butterfly will receive 22 equity shares of Crompton greaves for every 5 shares held by them in Butterfly, as of the record date. Post-merger, the public shareholders of Butterfly will hold ~3% stake in the combined entity. This scheme is subject to necessary statutory and regulatory approvals.
According to the companies, the merger will unlock various revenue and cost synergies to achieve economies of scale by pooling the combined resources and provide an impetus to grow across all parts of India.
Kotak Investment Banking is the financial advisor and has also provided a fairness opinion to the board of directors of Crompton on the share exchange ratio, while SBI Capital Markets provided the same to Butterfly’s board for the merger.
Ernst & Young Merchant Banking Services LLP and PwC Business Consulting Services LLP have been appointed as independent valuers by Crompton and Butterfly respectively and have recommended a share exchange ratio.
With a legacy of more than 80 years, Crompton is one of the leading companies in the categories of Fans and residential pumps. It has a market capitalization of ₹ 18682 crores and is a mid-cap stock. It has a good return on equity of 26.38% and an ideal debt-to-equity ratio of 0.67.
Butterfly is a leading manufacturer of domestic kitchen and electrical appliances in India. The company has a market capitalization of 2280 crores and is a small-cap company. It has a low return on equity of 7.03% and an ideal debt-to-equity ratio of 0.02.
Butterfly Gandhimathi was once a Dolly Khanna stock. She held a 1.8% stake in March 2022 after which her name disappeared from the list of shareholders who hold more than 1% shares. She might still be holding less than a 1% stake in the company, however, this information is not publicly available.
Crompton Greaves Consumer Electricals acquired an 81% stake in Butterfly Gandhimathi in two tranches. This happened at a price of ₹ 1403 per share in February 2022 and later sold a 6% stake in September 2022 at ₹ 1370 per share due to regulatory requirements.
According to Nomura India, Butterfly Gandhimathi commands higher gross margins (36.3 per cent in 9MFY23) than Crompton Greaves Consumer Electricals (31.1 per cent in 9MFY23), but its Ebitda margins of 10.2 per cent in 9MFY23 are depressed due to higher overhead and marketing costs.
Given Crompton’s brand equity and reach, it expects Butterfly Gandhimathi to grow revenue at a 16 per cent CAGR over FY23-25F and sees Butterfly’s Ebitda margins improving to 13.5 per cent in FY24 and 15.2 per cent in FY25. Hence it expects the transaction to be EPS accretive by FY25F.
Written by Simran Bafna
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