Wipro demerger: What is the best option for the shareholders?
The demerger does not in any way change the prospects of Wipro and shareholders should chose the option to get shares of a known entity that is listed on the stock market
Azim Premji-led Wipro has come out with its share sale through offer for sale (OFS) route, following approval from the Karnataka High Court and market regulator Securities and Exchange Board of India (SEBI). Wipro, India’s third largest software company, had announced that it will demerge its non-IT businesses such as consumer care and lighting into a new company and focus exclusively on IT. The board of directors approved the demerger of Wipro Consumer Care & Lighting (including Furniture business), Wipro Infrastructure Engineering (Hydraulics & Water businesses), and Medical Diagnostic Product & Services business (through its strategic joint venture), into a separate company. Wipro will remain a publicly listed company focussing exclusively on information technology. Last year in December, its shareholders had approved the scheme of arrangement between Wipro (demerged company), Azim Premji Custodial Services Pvt Ltd (resulting company) and Wipro Trademarks Holding (trademark company). The scheme was approved by the Karnataka High Court in March 2013.
The “resulting company” is a private limited company whose equity shares are not listed on any stock exchange. It proposes to carry on the diversified non-IT businesses after the effective date.
Under the scheme, each holder of equity shares of Wipro shall be entitled to receive equity shares or redeemable preference shares in the Resulting Company as follows:
(i) Resident shareholders of Wipro can choose from the following options: receive
(A) One share with a face value of Rs10 of the Resulting Company for every five shares of Rs2 each of Wipro held by such shareholder,
(B) One 7% redeemable preference share (RPS) with a face value of Rs50 of the Resulting Company, for every five shares of Rs2 each of Wipro
(C) One share of face value of Rs2 each of Wipro from transferring promoters in exchange for every one and sixty five hundredths (1.65) shares of the Resulting Company
(ii) Non-resident shareholders of Wipro, excluding holders of Wipro ADSs, shall receive
(a) One share with a face value of Rs10 in the Resulting Company for every five shares of Wipro held by such shareholder and
(b) One share of face value of Rs2 each of Wipro from transferring promoters in exchange for every one and sixty-five hundredths (1.65) shares of the Resulting Company
What should you be doing if you are a Wipro shareholder?
While TK Kurien, CEO, IT Business and executive director claims that “Creating a technology-focused company will allow us to better serve the needs of our customers, and accelerate investments necessary to capitalize on market growth opportunities”, you must remember the demerger does not in any way change the propspects of Wipro.
Suresh Senapaty, CFO and executive director, Wipro says, “The businesses of Wipro Enterprises are diverse, and this demerger gives them an opportunity to pursue their independent growth plans. I believe the demerger scheme reflects a high standard of governance, transparency and fairness for all stakeholders”. Once again, this will not change the prospects of Wipro.
According to us, Option A is the worst of the lot. Here is why…
1. You will be stuck with the shares of an unlisted company, which may not be the best in its field.
2. The “Resulting Company” itself will be a diversified company. What is the connection between lighting, soap and medical equipment? None.
3. This the also less profitable part of the business. The IT business contributed approximately 86% of revenue and 94% of profit, before interest and tax.
Option B is no better because you are getting only redeemable preference shares, which will be converted into the shares of the unlisted resulting company at an unkown valuation at a future date.
Option C is the best option. You get the shares of a known entity, listed in the stock market. You can exit when you want to.
Now, here is the final suggestion. Either now or later (after you have got more shares of Wipro under Option C), sell them and buy shares of TCS. TCS has a much better exposure to the IT sector than Wipro, which is struggling to grow.
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