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

Moneybloke

9 thoughts on “Henkel and Jyothy Lab situation

  1. As i had said before, there will be no delisting..Jyoti will amalgamate Hankel with itself..as declared today..

  2. Hi any idea how much advance tax Jyothy has paid this year? That could give an indication that when do they want the loss in their books. I presume that in case they want losses this year, they would have reduced the advance tax payments.

  3. “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.”

    Why should there be delisting? Jyothi can just amalgamate it as it is today itself.

  4. Saurabh

    You are right that Jyothy has taken a loan of 600 cr. Kotak has been very happy to lend that money to them. It is a 91 day rolling debenture that would most probably keep getting rolled. Jyothy has about 70-80 crores of cash generation every year and Kotak would be very happy to lend them further money.

    On a combined basis a 10% PBT on turnover of 1200 means, there would be a tax liability of about 40 cr which can be saved Jyothy by amalgamating.

    Also, there is a queue of private equity guys wanting to buy into Jyothy. Money is also not a problem.

    Jyothy with a market cap of 1100 cr can easily do a QIP at 200 for a 5% dilution and raise the money.

    I do hope you are convinced about this angle. Do write in as you think of other issues

    Cheers

    • Thanks. I also, checked raising money should not be an issue.

      A fundamental question due to lack of my knowledge: Is it necessary to become a WOS to claim the accumulated losses as per Sec. 72A?

      cheers,
      saurabh

      • This is where we need help of a CA. I am not qualified. To comment on this. I would think that Henkel would need to be folded into Jyothy for them to take advantage of tax breaks of Henkel.

  5. Hi,

    Jyothy Lab had planned to refinance debt of Henkel to tune of around 600 crs. If that has happened they might struggle to raise additional debt of 75 crs in this environment.

    Regards,
    Saurabh

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s