Modes of Business Reorganisation*

October 2009

PricewaterhouseCoopers *connectedthinking

PwC
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Table of Content

Restructuring An Overview Why Restructure Methods of Restructuring Important regulations Newer Modes of Restructuring Leveraged Buyouts Delisting Case Studies

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Restructuring An Overview

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Why Restructure
Tax Efficiency Unlock Value

Family Arrangement

Pre IPO

Corporate Restructuring
JV / Alliance Balance Sheet resizing

Acquisitions

Regulatory

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Methods of Restructuring

Mergers

Acquisitions

Corporatization

Spin off

Others

Horizontal Vertical Conglomerate Triangular

Acquisition of promoters stake Open offer Asset acquisition Business acquisition

Part IX Sale of business

Demerger of division Slump Sale Itemised Sale of Assets

Buy Back Capital Reduction

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Important Regulations
Stamp duty

SEBI

FDI

Companies Act

Exchange Control

Indirect tax

Accounting Implications

Competition Act

Tax regulations

Multiple laws affect every M&A action

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Newer Modes of Restructuring

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Leveraged Buyouts

LBO is a strategy where a financial sponsor gains control of a majority of a target companys equity through the use of borrowed money or debt.

In an LBO, there is usually a ratio of 70% debt to 30% equity

The purpose is to allow companies to make large acquisitions without having to commit a lot of capital.

In LBO, assets of the acquired company act as collateral for the debt The exit strategy for the LBO is generally to break up and sell the acquired company or conglomerate or an IPO of the acquired company

Usually leveraged buyout firms look to achieve an IRR in excess of the WACC

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Delisting

Delisting of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence, the securities of that company would no longer be traded on that stock exchange
Different from Suspension or Withdrawal of admission to dealings of the

securities on the Exchange

Different from buy-back of securities in which securities of the company

are extinguished with consequent reduction of capital of the company

Failure to comply with minimum public shareholding criteria shall attract Delisting Regulations Flexibility in decision making, onerous corporate governance obligations may prompt companies to opt for delisting Need to comply with Reverse Book Building Process
Prone to influence by bulk shareholders / traders

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Case Studies

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Case Study 1 - Business Consolidation

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Case Study 1
Present
Ultratech Shareholders Grasim Shareholders
35%

Post Demerger
Grasim Shareholders Ultratech Shareholders

Grasim
Others
55%

Grasim
Cement Others

Cement

45%

100%

65%

55%

45%

Ultratech

Samruddhi

Samruddhi

Ultratech

Scheme proposed to demerge the Cement division of Grasim into its WOS Samruddhi Samruddhi to issue 1 equity share for every equity shares held in Grasim Grasims stake to be diluted to 65% Samruddhi to be listed pursuant to demerger

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Case Study 1
Post Demerger
Grasim Shareholders
35%

Proposed Structure
Ultratech Shareholders Grasim Shareholders Ultratech Shareholders

Grasim
Cement Others

Grasim

A% (55%<A<65%) 55% 45% B% (1-A-B)%

65%

Ultratech Samruddhi Ultratech

Merger

Post Demerger, Samruddhi to be merged with UltraTech Grasim to hold stake between 55% - 65%, post merger Maintaining adequate control in UltraTech Reason for a two stage consolidation Stamp Duty payable twice 1st on demerger and 2nd on merger

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Case Study 2 - Restructuring for Regulatory Compliance

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Case Study 2 . . . .
Pre-restructuring
Indian Promoters 24% Foreign Promoters 23% FII 31% Balance (including public) 22%

Listed Co. Business cylos in List Co News business DTH business Cable business Entertainment business

Only 26% total foreign equity shareholding allowed in News business Only 49% total foreign equity shareholding allowed in Cable business & Direct to home (DTH) business

As per MIB guidelines of uplinking for news channel largest Indian shareholder should hold atleast 51% of the total equity capital of the broadcasting company Segregation of business for value unlocking, transparency and capital inflow
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. . . .Case Study 2
News business of ListCo was demerged into SPV 1 - Entire Foreign Promoter holding in the news company transferred to Indian promoters - Scheme provided that FIIs over certain % on the record date to be issued Preference

Shares, to ensure, FII stake does not cross the prescribed FDI limits
Cable and DTH business of ListCo were demerged into two separate companies viz. SPV 2

and SPV 3 respectively

As in the case of News Business, part of the foreign promoter holding in the two resulting

entities was transferred to Indian promoters to comply with regulatory guidelines

Benefits Resulting shareholding

Resulting structure FDI compliant. Possible to have a clear-cut leadership and direction for the growth Ease of entry for strategic investors Value unlock
Shareholders

SPV 1 (News Business)

SPV 2 (Cable Business)

SPV 3 (DTH business)

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Case Study 3 - International Listing

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Case Study 3
UTV Mauritius, was set up as a WOS of
UTV India UTV India
76%

UTV India, for engaging in exploitation of overseas rights

Subsequently, UTV Mauritius acquired the

100% >1%

UTV Motion Pictures (IOM)

24%

AIM Investors

movie portfolio (library of existing movies) of UTV India and ventured into coproduction of movies
Funding requirement for the expansion

~100%

UTV Mauritius UTV Mauritius

Movie Production and rights exploitation

UTV India incorporated a company in Isle

of Man (IOM) and diluted its stake for AIM listing

UTV Motion Pictures infused funds in UTV

Mauritius

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Case Study 4 - LBO

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Case Study 4 . . . .
Tata Steel India
Equity of $3.88 bn

Combined entity to become 5th largest producer of steel from 56th Would have taken several years for Tatas to build an enterprise of a size of Corus
Debt

100% Singapore Co 100%

Acquisition to provide significant presence in Europe Methodology

UK Co 1
Acquired Corus out of $3.88 bn & long term debt of $8.12 bn from consortium of banks

Debt

100%

UK Co 2
100%

Debt

SPVs were floated in UK under the name Tata Steel UK. Tulip Holdings (1,2,3) which were ultimately held by a Singapore SPV Tata Steel alongwith the SPVs incorporated in Singapore and UK raised the requisite debt of USD 8.12 bn constituting 68% of the total acquisition value of USD 12 bn. Monies raised by way of debt was pushed in each subsequent subsidiary and ultimately in Corus. Following loan facilities were used for financing the acquisition: Bridge Facility; Term Loan; Revolving credit facility;

UK Co 3
100% Tata Steel UK

Debt

Corus
---- To be merged with Corus

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. . . . Case Study 4
Tata Steel acquired CORUS plc. for $12 bn

Equity Contribution of $ 3.88 bn & Borrowings of $8.12 bn through subsidiaries

Tax consolidation in UK, tax shield on interest available to Corus Debt-equity ratio of funding is 68:32 Possible merger of Tata Steel UK with Corus

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Case Study 5 - Off shoring of business

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Case Study 5
Ballarpur Industries Ltd. (BILT) 100% 100% BILT Graphic Paper Products Ltd. (BGPL)

BILT is listed on BSE and NSE and is engaged

in manufacture and sale of paper

Pursuant to a Scheme of arrangement and

A Ballarpur
International Holdings, B.V. (Netherlands) 100%
Ballarpur Paper Holdings B.V. (BPH)

reorganization, 3 undertakings of BILT were transferred to BGPL in exchange of equity shares of Rs. 450crs and debentures of Rs. 1500crs of BGPL
Scheme also provided for buy back of 40% of

the post-split equity shares of BILT

- Option to shareholders holding 1,000 equity

97.8%

Sabah A B
Issue of Equity Shares of Rs.450 crs and Non-Convertible Debentures of Rs.1500 crs Transfer of equity shares and debentures of BGPL to BPH for cash consideration

shares or less to sell their entire holdings in List Co

BILT transferred the shares and debentures

received above to BPH

- Funds received from BPH to be utilised for

The restructuring prepares BPH and BIH for future listing in the international market

retirement of debts and to fund buyback of its shares

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Case Study 6 - Right Sizing Balance Sheet /Utilisation of SPA

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Case Study 6 . . . .
Determinants Issues

Accounting losses in the Balance sheet Diminution in value of assets / intangible assets Deficit created pursuant to mergers/ demergers

Affects capital market perception Inability to pay dividend despite profits Hit to the Profit & loss account

Solution Effects:

Adjust the asset/ deficit against Securities Premium account/ other reserves Achieves rightsizing of the Balance sheet No negative impact on financial ratios (except diminution in value of assets) Improves capital market perception Check MAT implications

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. . . . Case Study 6

Scheme of Arrangement between Sintex Industries Limited and its Equity Shareholders
- The Company has been making acquisitions and strategic partnerships in India as well

as overseas;
- Proposal to create an International Business Development Reserve (IBD Reserve)

by appropriating Rs. 200 crs from its SPA as on March 31, 2008
Reserve so created to be utilised by the Company towards the acquisition

expenses
- Aforesaid restructuring carried out under Scheme of Arrangement under Section 391

read with Sections 78, 100 to 103 of the Cos Act

- Scheme approved unanimously by all the Equity Shareholders and sanctioned by the

Gujarat High Court

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Case Study 7 - Back Door Delisting / Privatization of Business

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Case Study 7A Kothari Products

Shareholders

KPL carries out real estate and tobacco business Scheme of Arrangement between KPL and PPIL
- Scheme provided for demerger of Tobacco

Kothari Products Limited (KPL)

Real Estate

Division, Beverages Division & Trading Division from KPL to PPIL;

- KPL is listed on BSE, NSE
Demerger of Tobacco business

Tobacco

- Discharge of consideration by issue of Non-

cumulative Redeemable Non-convertible Preference Shares

- NoC to Scheme from the Stock Exchanges

Pan Parag India Limited (PPIL)

and approval by majority of shareholders

- Scheme sanctioned by the Allahabad High

Court
- May be construed as back door delisting
Objective was to separate tobacco business due to risk associated and ease the fund raising in real estate

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Case Study 7B Macmillan

Macmillan is listed on BSE, NSE Scheme of Arrangement providing for merger of two WOS into Macmillan and demerger of Publishing Business into Macmillan Publishers, a company floated by promoters

Scheme provided that the Macmillan Publishers will not be listed on any Stock Exchange pursuant to the Scheme

Consideration for Demerger discharged in the form of issue of Equity Shares of Macmillan Publishers to shareholders of Macmillan in accordance with the exchange ratio

Exit opportunity was provided to all the shareholders except promoters to - retain shares in the unlisted Resulting Entity; or - offer to sell the shares in the unlisted Resulting Entity to promoters; - If no option exercised within 3 months from the Record Date deemed such members

have chosen to transfer shares of Macmillan Publishers to promoters

- Shareholders to have option to return the cheque along with a letter exercising the

option to continue as shareholder within 60 days of receipt of the cheque

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Case Study 7C English Indian Clays

English Indian Clays (EIC) engaged in business of clay mining & refining and manufacture of starch and allied products
Shareholders

Objective was to delink the investment division and to squeeze out the minority shareholders therein
Invstmt Unit English Indian Clays

As a part of restructuring, investment division was demerged to Bharat Starch; options to shareholders:
BPL to issue 4 Equity Shares for 19 shares in E Ltd. Option to receive 400 CRPS for 19 Equity shares in E Ltd. 8% CRPS, tenure 10 years

Bharat Starch (Unlisted)

* Various Options to Shareholders

- Shares issued pursuant to demerger would not be listed - Option to shareholders to sell equity shares to promoters at

the rate of Rs. 1000 each, till 1 year from the record date

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Case Study 8 - Family Arrangement

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Case Study 8 . . . .

Reliance, amongst the most pioneer groups of India As a part of family arrangement, the business of Reliance was segregated into five undertakings which were hived off into four subsidiaries. Each of these subsidiaries issued its shares to the shareholders of RIL in the ratio of 1:1
Reliance Industries Ltd Shareholders

Reliance Industries Ltd Coal based energy Undertaking ASSETS Fixed assets Shares in REL, RPL, Hirma Power Pvt Ltd, Jayamkondam Power Pvt Ltd, Reliance Thermal Energy Pvt Ltd etc. Loans and Advances LIABILITIES Related Loans PERSONNEL Gas based energy Undertaking ASSETS Fixed assets Shares in Reliance Patalganga Power Ltd. Loans and Advances LIABILITIES Related Loans PERSONNEL PERSONNEL Financial Services Undertaking ASSETS Fixed Assets Shares in RCL, Reliance General Insurance, Reliance Life Insurance Loans and advances LIABILITIES Related Loans Telecom Undertaking ASSETS Fixed assets Receivables for capital leases Shares in RCIL, Reliance Telecom, Reliance Infocomm, World Tel holding Ltd., Preference shares of Reliance Telecomm Loans and Advances LIABILITIES Related Loans PERSONNEL Remaining Undertaking

Petrochemicals, Oil & Gas, Textiles and other business

Reliance Energy Ventures Ltd (REVL)

Reliance Natural Resources Ltd (formerly Global Fuel Management Services Ltd.)

Reliance Capital Ventures Ltd (RCVL)

Reliance Communications Ventures Ltd

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. . . . Case Study 8

RCVL was subsequently merged with Reliance Capital Ltd (RCL)

- 5 equity shares of face value of Rs. 10 each were issued to the shareholders of

RCVL for every 100 equity shares of the face value of Rs. 10 each
- Appointed Date = Effective Date

REVL merged with REL

- 7.5 equity shares of face value of Rs. 10 each were issued to the shareholders of

REVL for every 100 equity shares of the face value of Rs. 10 each
- Appointed Date= Effective Date

Benefits of the restructuring

- Value unlock - Segregation of business thereby providing settlement between family members - Investment opportunities to investors for different segments

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Case Study 9 - Business Acquisition

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Case Study 9 . . . .
(e) (d)

Grasim 15%

Other 68% (b) Shareholders 85%

12% (b)

L&T Employees Trust

(c)

20% (b)

L&T

(a)

Engineering

Cement

Ultra Tech Cemco Ltd. CemcoLtd.

Grasim ultimate s shareholding 51%

Issue of Shares Transfer of shares Shareholding

a) Demerger of Cement business into UltraTech Cemco b) Issue of shares by Cemco 80% (68% + 12%) to L&T shareholders and 20% to L&T c) Grasim acquires another 8.5% stake in Cemco from L&T for Rs. 362 crs d) Grasim makes an open offer to acquire 30% in Cemco total outflow for Grasim - Rs. 1,278 crores e) Grasim sells its 15% stake in L&T to the Trust for Rs 446 crs Trust funded by L&T

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. . . . Case Study 9

Particulars
L&T Grasim Other Shareholders

Pre - Restructuring Shareholding in L&T

Post Demerger Shareholding in L&T 15.00% 85.00% in Ultratech 20% 12.6% 67.4%

Post Restructuring shareholding in Ultratech 11.5% 51.1% 37.4%

15.00% 85.00%

Demerger scheme compliant with tax provisions Grasim with 51% shareholding acquires control of Cemco L&T management gets control of 15% (held through the Trust) stake previously held by Grasim

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Case Study 10 - Cross Border Merger

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Case Study 10

of e s su Is are sh

Shareholders

Scandent is a company listed on BSE, NSE, Madras Stock Exchange and Ahmedabad Stock Exchange and is engaged in IT sector Cambridge was a Delaware based holding / investment company which held investment in operating companies engaged in IT / ITES in US and other jurisdictions Scandent wanted to acquire Cambridge and hence as a part of restructuring Cambridge was merged with Scandent
-

Scandent

Cambridge
r ge er M
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Merger of Delaware company with Indian company permitted as per Delaware laws and Indian laws Scandent issued shares to the shareholders of Cambridge as consideration for merger

Objective was to acquire Cambridge without any cash outflow

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Thank You

This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. Without prior permission of PricewaterhouseCoopers, the contents of this presentation may not be quoted in whole or in part or otherwise referred to in any documents.

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2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).

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