Henkel-Jyothy Lab ( Tax Issues primer )

Found this interesting presentation on tax issues in Mergers & Acquisitions. Hopefully serious practitioners of special situation investing will find it useful.


Based on available information so far, Jyothy can do both- a high court administered Amalgamation or a reverse merger where apparently High Court permission is not required ( not very sure about this ). A reverse merger would mean Jyothy getting merged into Henkel and the resulting company can be called Jyothy or Jyothy Henkel or whatever.

Moot question is the valuation of Henkel at the time of amalgamation. Well, it can be anything. However, I am going by the assumption that Jyothy wants to be a serious player in Indian FMCG space and will not do anything that smacks of hurting the interest of small shareholders.

Well, there are no guarantees in this business and that is what makes investing so fascinating. I mean, it would be totally boring if all thesis panned out the way they were originally thought of and I am sure there will be some twists in this story as well.

So here is to making some money in this as well!

Happy Investing.

PS; if you hv problem downloading this, send me yr email and I will mail it to you

Henkel and Jyothy Lab situation

Jyothy Lab acquired Henkel India, first by acquiring 14.9% from TN Petro, an AC Muthaiah company which was JV partner of Henkel and then 50.6% of Henkel ( the international company). Besides these they acquired roughly 3% before open offer and about 12-13% in open offer at 41.2 ( all number approximate since I am writing this out of memory ). Currently Jyothy Lab holds 83.5%  of Henkel and Public holds about 16.5% ( approx 19 million shares ).

One of the big kickers for the deal besides the strategic move for Jyothy is the accumulated losses of 450 Cr in Henkel. Integration of businesses is happening at a fairly fast clip and I expect that Henkel will be cash positive and profitable pretty soon, given the prudent cashflow management practices of Jyothy ( something about these Tamilians-they are pretty good with prudent action when they do ).

I am considering buying Henkel which was at 22 day before (already at 24 as I write this ). My thesis is that if Jyothy has to take advantage of this accumulated loss then the only way is amalgamation of Henkel in Jyothy. This means delisting by way of buying out the shareholders or issuing Jyothy shares to 19 million shares of Henkel.

Now, the open offer price was 41 so I expect that Jyothy will price the exchange or cash at the same level atleast. I doubt if it is worth rocking the boat by doing the exchange at a lower level since that can be challanged in the court of law ( a la Cadbury ) and the cost is just about 75-80 Cr.

Also it would be advantageous for Jyothy to do the amalgamation sooner than later to take advantage of tax breaks. Anyways market does not expect big shake from this acquisition and Jyothy share price reflects this. Hence even if they were to take the tax break and show notional losses, shareholders would not lose much.

So I am expecting a 70-90% return over 18 months period in which I expect this process to get complete.

Would someone please punch holes in this thesis?

Happy investing