Wipro Demerger Effective From March 31
Wipro had announced a scheme of arrangement for the demerger of its ‘diversified business’ into a separate company to be named Wipro Enterprises Ltd. (WEL), which will be an unlisted company. This diversified business includes Wipro Consumer Care & Lighting (including furniture business), Wipro Infrastructure Engineering (hydraulics and water businesses) and Wipro’s Medical Diagnostic Product & Services business.
The demerger was approved by the Board of Directors on November 1, 2012 and is effective from March 31, 2013. The scheme has been approved by the High Court of Karnataka and the order has been filed with the Registrar of Companies. Wipro announced that April 11, 2013 has been fixed as the record date for the purpose of determining the members of the company to whom securities of the resulting company will be allotted and who will be entitled to the exchange right pursuant to the scheme of arrangement. It is likely to take about 6 weeks from the record date for the whole process to be completed.
To carry out this restructuring, Wipro has suggested the following options for shareholders to choose from as per their investment objectives,
- Receive one equity share with a face value of Rs 10 in Wipro Enterprises Ltd. for every five equity shares with a face value of Rs 2 each in Wipro Ltd. that they hold; or
- Receive one 7% Redeemable Preference Share (RPS) in Wipro Enterprises Ltd., with a face value of Rs 50, for every five equity shares of Wipro Ltd. that they hold; or
- Exchange the equity shares of Wipro Enterprises Ltd. and receive as consideration the equity shares of Wipro Ltd. held by the promoters. The exchange ratio will be 1 equity share in Wipro Ltd. for every 1.65 equity shares in Wipro Enterprises Ltd.
Each Redeemable Preference Share shall have a maturity of 12 months and shall be redeemed at a value of Rs.235.20
Effectively, since WEL would be an unlisted entity, shareholders are left with 2 options,
A. Go for Option 1 and at the time of demerger, convert every 1.65 equity shares of WEL into 1 equity share of Wipro (or 1 share of WEL to 0.6061 shares of Wipro), thus effectively holding 5.6061 shares of Wipro.
B. Go for Option 2 and get a redeemed value of Rs 235.20 per share of WEL after 1 year post the demerger.
The effective price of Wipro shares, with option A comes to Rs 392.43 per share while according to option B, it comes to Rs 396.04 per share. We think Option A would be beneficial for investors considering the fact that it is available for a lower price and that investors would get the conversion done at the time of the demerger rather than waiting for a period of 1 year to garner returns.
Moreover, it would be beneficial to hold the shares of Wipro after the demerger since the new entity would concentrate solely on the IT business. The non-IT business of Wipro contributed to 14% of the revenues and 7% of the operating income. Being the relatively less profitable bit of the consolidated business, the demerger would enable Wipro to command an upward revision of its PE multiple.
Hence, we recommend shareholders to opt for Option A to grab a better deal. Also, if at the time of conversion, if the CMP of Wipro is Rs 395 or more, it would be beneficial to go for Option A. Else, Option B would be feasible.