Ruchi Soya Merger With Patanjali Foods

Ruchi Soya Merger With Patanjali Foods

This year has become the flavour of #megamergers in India. With all the noise on HDFC Bank and HDFC Limited mergers, another merger is happening in the food business, with Ruchi Soya merging with #Patanjalifoods.

𝐎𝐧𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐢𝐠 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐢𝐧 𝐈𝐧𝐝𝐢𝐚 𝐫𝐞𝐚𝐜𝐡𝐞𝐝 𝐨𝐮𝐭 𝐭𝐨 𝐠𝐞𝐭 𝐦𝐲 𝐫𝐞𝐯𝐢𝐞𝐰 𝐨𝐧 𝐭𝐡𝐞 𝐦𝐞𝐫𝐠𝐞𝐫 𝐚𝐧𝐝 𝐢𝐟 𝐢𝐭 𝐦𝐚𝐤𝐞𝐬 𝐬𝐞𝐧𝐬𝐞 𝐭𝐨 𝐢𝐧𝐯𝐞𝐬𝐭 𝐦𝐨𝐧𝐞𝐲 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐭𝐨𝐜𝐤.

As i got my analysis going, i unravelled a few items about Ruchi Soya.

1)The company has a 𝐦𝐚𝐬𝐬𝐢𝐯𝐞 𝐝𝐞𝐛𝐭 𝐭𝐨 𝐭𝐡𝐞 𝐭𝐮𝐧𝐞 𝐨𝐟 𝐑𝐬.𝟑,𝟖𝟎𝟎 𝐜𝐫𝐨𝐫𝐞𝐬, 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐜𝐨𝐯𝐞𝐫𝐚𝐠𝐞 𝐫𝐚𝐭𝐢𝐨 𝐢𝐬 𝐧𝐨𝐭 𝐡𝐢𝐠𝐡 𝐞𝐧𝐨𝐮𝐠𝐡, 𝐫𝐞𝐬𝐮𝐥𝐭𝐢𝐧𝐠 𝐢𝐧 𝐚 𝐩𝐨𝐨𝐫 𝐫𝐚𝐭𝐢𝐧𝐠. Thus, the lenders have increased the interest rates to 19% for repayments.

2)Thus, the firm did an 𝐅𝐏𝐎 𝐚𝐧𝐝 𝐫𝐚𝐢𝐬𝐞𝐝 𝐑𝐬.𝟒,𝟑𝟎𝟎 𝐜𝐫𝐨𝐫𝐞𝐬 𝐭𝐨 𝐫𝐞𝐩𝐚𝐲 𝐭𝐡𝐞 𝐝𝐞𝐛𝐭. This round also helped reduce the promoter stake from 98% to 80%, bringing it to the minimum public holding of 25%.

𝐍𝐨𝐰, 𝐥𝐞𝐭 𝐮𝐬 𝐭𝐚𝐥𝐤 𝐚𝐛𝐨𝐮𝐭 𝐭𝐡𝐞 𝐦𝐞𝐫𝐠𝐞𝐫.

This merger helps 𝐑𝐮𝐜𝐡𝐢 𝐬𝐨𝐲𝐚 𝐦𝐨𝐯𝐞 𝐟𝐫𝐨𝐦 𝐞𝐝𝐢𝐛𝐥𝐞 𝐨𝐢𝐥 ( 𝐚 𝐥𝐨𝐰 𝐦𝐚𝐫𝐠𝐢𝐧 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬) 𝐭𝐨 𝐟𝐨𝐨𝐝 𝐩𝐫𝐨𝐜𝐞𝐬𝐬𝐢𝐧𝐠 (𝐚 𝐡𝐢𝐠𝐡 𝐦𝐚𝐫𝐠𝐢𝐧). Though this action is favourable for its shareholders, the big question with any merger is:

𝟏)𝐇𝐨𝐰 𝐰𝐢𝐥𝐥 𝐑𝐮𝐜𝐡𝐢 𝐒𝐨𝐲𝐚 𝐟𝐮𝐧𝐝 𝐭𝐡𝐢𝐬 𝐚𝐜𝐪𝐮𝐢𝐬𝐢𝐭𝐢𝐨𝐧?

𝟐)𝐖𝐡𝐚𝐭 𝐢𝐬 𝐭𝐡𝐞 𝐩𝐫𝐢𝐜𝐞?

1)First, i did the intrinsic valuation of Ruchi Soya 𝐰𝐢𝐭𝐡𝐨𝐮𝐭 𝐅𝐏𝐎 𝐚𝐧𝐝 𝐯𝐚𝐥𝐮𝐞𝐝 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐚𝐭 𝐑𝐬.𝟒𝟎𝟎/𝐬𝐡𝐚𝐫𝐞. I assume the firm will continue with the edible business and existing debt load.

2)Then, i valued the company after FPO, where the firm uses the proceeds to repay the debt. Thus, debt is zero, and cash increases to Rs.98 crores. As a result, the 𝐯𝐚𝐥𝐮𝐞/𝐬𝐡𝐚𝐫𝐞 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞𝐬 𝐭𝐨 𝐑𝐬.𝟓𝟖𝟐.𝟗𝟑.

3)Then, i value Ruchi Soya after the merger. Thus i increase the margin profile to 15% from 5%. 𝐓𝐡𝐞 𝐯𝐚𝐥𝐮𝐞/𝐬𝐡𝐚𝐫𝐞 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞𝐬 𝐭𝐨 𝐑𝐬.𝟏,𝟏𝟎𝟎/𝐬𝐡𝐚𝐫𝐞.

However, i have missed the price the firm needs to pay Patanjali to distribute its products. So here, i have assumed two things:

1)An outright sale where Ruchi Soya acquires Patanjali foods and assumes its liabilities. Here, we need to know the goodwill rising out of this deal.

2)Ruchi Soya could pay a lump sum + royalties for using Patanjali’s brand and give Patanjali a share of sales proceeds. Here Patanjali has a promoter stake.

Now, i dont know how Patanjali values its food business, but one thing is clear. To fund this deal, 𝐑𝐮𝐜𝐡𝐢 𝐒𝐨𝐲𝐚 𝐡𝐚𝐬 𝐭𝐨 𝐫𝐚𝐢𝐬𝐞 𝐚 𝐐𝐈𝐁/𝐫𝐢𝐠𝐡𝐭𝐬 𝐢𝐬𝐬𝐮𝐞. 𝐈𝐧 𝐦𝐲 𝐯𝐢𝐞𝐰, 𝐭𝐡𝐢𝐬 𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐲 𝐢𝐬 𝐨𝐩𝐭𝐢𝐦𝐚𝐥 𝐝𝐞𝐬𝐩𝐢𝐭𝐞 𝐝𝐢𝐥𝐮𝐭𝐢𝐨𝐧 𝐚𝐬 𝐢𝐭 𝐭𝐚𝐤𝐞𝐬 𝐜𝐚𝐫𝐞 𝐨𝐟 𝐞𝐯𝐞𝐫𝐲𝐨𝐧𝐞’𝐬 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭𝐬.