Asia: BASF to Merge Subsidiaries in India

Sep 14,2010    The parent company’s intentions are a critical aspect for investors assessing multinational stocks. Its intentions influence strategy, performance and more importantly, whether minority shareholders benefit. For example, a higher royalty outflow will benefit the parent, but not minority shareholders.


Chemicals maker BASF India Ltd’s shareholders seem to think that the parent’s actions may benefit them. Its share price rose by 6% after it announced the merger ratios for three BASF group companies present in India.


Shareholders of the listed subsidiary typically regard wholly owned local subsidiaries of the parent with distrust. They fear, not without reason in some cases, that the parent will maintain status quo at the listed subsidiary and pursue growth opportunities through the unlisted one.



But BASF appears to be treading a different path. When BASF acquired Ciba globally, it decided to merge the listed company Ciba India Ltd with BASF India.


One of the three companies to be merged with BASF India is its own wholly owned subsidiary BASF Polyurethanes India Ltd. In fiscal 2010, this company’s sales rose by 23% to Rs. 250 crore but it incurred a loss of Rs. 70 lakh. This is lower than the previous year’s loss of Rs. 20 crore. It makes polyurethane chemicals which find use in industries such as automobiles, refrigeration, construction and shoe making. BASF had earlier informed shareholders that the parent intended to acquire this subsidiary, subject to certain conditions, and it was examining the feasibility of these conditions. This proposal appears to have been dropped as it will be merged with the parent. The merger will have no impact on its equity capital or consolidated performance, since it is a 100% subsidiary. But it brings the business directly into its fold and could yield some operational benefits.


The other companies being merged are BASF Coatings India Pvt. Ltd and BASF Construction Chemicals (India) Pvt. Ltd. BASF Coatings supplies to original equipment manufacturers and claims to be among the top three automotive coating players in the country. Kansai Nerolac Paints Ltd, Asian PPG Industries Ltd and Akzo Nobel are its main competitors in this market. BASF Construction supplies products to the construction industry for use in making concrete, industrial flooring, tile adhesives and other specialized applications.


BASF plans to grow faster than the market in the Asia-Pacific. India and China will be key markets driving this growth.


Shareholders may spot another angle to this development. The parent company’s stake could increase after the mergers, from the current level of 71.7%. By shoring up their stakes, if BASF plans to delist the company, then it would need to buy a lesser amount from the public. But that seems unlikely, as these appear to be strong businesses, which may even add to the listed company’s worth, making it more expensive. But these will become clear only when the financials and equity capital of the privately held companies are not known. As of now, BASF India’s shareholders seem to think they will benefit from the merger.