Crompton acquires controlling stake in Butterfly. Seems an attractive buy.

Crompton Greaves Consumer Electricals (CGCE) has announced acquiring a controlling stake in Butterfly Gandhimathi Appliances (BGA).

Key points to note:

  • CGCE is acquiring 55% stake from BGA’s promoter group @ Rs 1,403/ share
    • Consideration value for this tranche comes to Rs 1,379.68 crore
    • Promoters total stake in BGA is currently 64.78%. Balance not selling may have decided to continue holding.
    • BGA’s current share price is at similar levels indicating no premium in the transaction price. However, the share price has moved significantly in last 1 year implying the subject news was already factored in.
  •  CGCE in line with the regulations will be launching an open offer for additional 26% @ Rs 1,433.9/ share
    • Consideration value for this tranche comes to Rs 666.57 crore.
    • Of the balance non promoter shareholding 10.43% is held by institutions and remaining 24.79% by public
    • Given no significant premium over the currently prevailing price, I don’t expect much tendering to happen in the open offer – unless the stock corrects significantly in the interim. However, given that the stock is not cheaply valued (trailing P/E of >55x), anyone holding significant chunk (and hence difficult to sell in the open market) may actually tender.
  • CGCE is additionally paying Rs 30.38 crore to the promoters for acquiring Butterfly trademark in the allied and cognate classes.

Rationale of the transaction – as expected is to buy an established consumer brand in the kitchen and small appliances business.

Some key metrics for easy reference –

  • CGCE at Rs 25,000 crore market cap is 10x of BGA.
  • CGCE’s trailing twelve months sales were Rs 5,356 crore and profits at Rs 658 crore compared with Rs 1,012 crore and Rs 44 crore respectively of BGA. It seems very likely that BGA will add up much more to CGCE’s topline and bottomline as compared with what it was generating on it’s own. Factoring in that, the transaction becomes much more reasonably priced and attractive for CGCE. My guesstimate is a PE of 30-40x, similar to CGCE’s own multiples.
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