Kubota decides to buy fresh into Escorts. Promoters stay back.

There was a rumour few months back that Kubota will buyout Nanda family.

What has instead happened is that Kubota has decided to invest fresh and become a joint promoter with Nandas.

Key points to note –

• Kubota is investing Rs 1,873 crore into Escorts at a price of Rs 2,000/ share. As per regulations, it will do an open offer at same price to acquire additional 26% of the Company.
• Kubota already owns 9.09% in Escorts. This along with above would allow Kubota to hold upto 44.8% of Escorts (assuming full 26% open offer is subscribed). Nandas are not selling any of their stake and will hold about 11.8% stake of the diluted capital base. This is however subject to any further reduction in Escorts Benefits and Welfare Trusts (EBWT) shareholding of 16.3%. Both partners have agreed to analyse the viability of doing so. Assuming the whole EBWT portion gets cancelled, the stakes for Nanda family and Kubota will be 14.1% and 53.5% respectively. Detailed pre and post shareholding structure is provided below.
• Kubota will be reclassified under the promoter group and the name of Escorts will be changed to include Kubota.
• Entire group consolidation is planned that would include merging of Escorts Finance into Escorts and consolidation of other Escorts-Kubota JVs into Escorts. Details in the below charts.
• Nikhil Nanda will continue as the CMD of the Company and he will also be engaged in Kubota’s global operations.
• Board will comprise of 4 non-independent directors each from Kubota and Nandas. However, if Kubota becomes more than 40% shareholder, it will be allowed to appoint 5.
• Both Kubota and Nandas have a 5 year lock-in of shareholding and customary first right of refusal thereafter.
• In terms of rationale for the transaction – it’s as synergetic a transaction as one could hope for. Same industry and Global + Indian partners with their respective strengths.

There is nothing that seems off in the announced transaction. Yes, Nandas are losing defacto control because of their lower shareholding. However, Kubota being Japanese should come with patient and transparent style of working and hence I am not worried. Besides, in the announced transaction it doesn’t seem that Kubota is paying exorbitant.

One point that I am somewhat not sure is – how Indian regulators especially tax authorities would look at this transaction that entails a previous capital reduction and a planned further reduction. (EBWT)