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THE NATION: BALCO PRIVATISATION
It's A Going Concern
Shourie
stresses that BALCO was evaluated as a "going concern", and
not as a company headed for closure, with its fixed assets measured at
scrap value. "In selling a going concern, you look at the rational
expectation of future earnings, not the assets to be recovered,"
he says. Jardine Fleming arrived at a figure of Rs 412.5 crore by applying
the DCF method. To this was added, on the recommendation of an inter-ministerial
group, another 25 per cent as the "control premium", or the
extra price the investor should pay for obtaining full management control.
The DCF evaluation gave a higher figure than
those obtained by other methods, like:
# Balance sheet method: it uses the net worth
of the company, or sum of its paid-up capital and free reserves and surplus,
as the basis of evaluation. Following this, the evaluation of the 51 per
cent of the company stood at Rs 320 crore.
# Comparable valuation method: based on average
earning of the shares multiplied by the average price-earning multiple
of the industry sector. By this method the reserve price was worked out
at Rs 375 crore.
| Is the valuation
correct? |
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# Government
intends to sell BALCO as a going concern, and so prices it on the
basis of future earnings, discounted to their present value. The Opposition
says such a method ignores the price of its assets, including a 270
MW power plant.
# The Opposition says Government's adviser has failed to fully capture
the future revenue streams after modernisation. Government argues
that future projections can only be based on past and present performance
records.
# Opposition says that low bidding by HINDALCO, and Alcoa's opting
out, smack of bid fixing. Government says differences in bid prices
reflect the variety of investor perception. |
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The Opposition's grouse is that BALCO sits on
rich assets, including a 270 MW power plant, that were sold cheaply. Perhaps
to guard against such criticism, Shourie got the adviser to conduct a
quick asset evaluation. It set a value of Rs 1,070 crore for the entire
company, or Rs 545.7 crore for the 51 per cent shares sold. With control
premium added, the valuation then could well have been a much higher Rs
682 crore. That would have led to the cancellation of Sterlite's bid.
Shourie argues that it was not the intention
of the Government to sell BALCO at the asset price, as there would have
been no buyers in that range. "A National Textile Corporation unit
may have assets worth Rs 2,400 crore but will anyone pay that price?"
On the other hand, the Government had made up for selling low by withdrawing
earlier half of BALCO's paid-up capital of Rs 488.85 crore. The proceeds
of sale of 51 per cent equity to Sterlite and the withdrawn capital make
a tidy package of Rs 796 crore. Disinvestment Department officials say
they now expect the share value of BALCO to improve steadily, so that
its remaining 49 per cent stake can fetch a handsome price. It is a lot
better deal, they argue, than resting on BALCO's dividends of around Rs
18 crore. And even that would have dwindled, with net profits sliding
to Rs 55.89 crore in 1999-2000 from Rs 79.84 crore in 1997-98.
It is a different matter though that the intrinsic
long-term value of the company did not appeal to many investors. Sterlite's
was the only bid above the reserve price, the difference being only 8
per cent. HINDALCO, the industry leader belonging to the Aditya Birla
Group, fell out of the race by quoting Rs 275 crore, way below the reserve
price. Alcoa, the US giant, withdrew its bid for undisclosed reasons.
Naveen Agarwal, managing director of Sterlite, told INDIA TODAY that his
company went ahead with bidding "rather high" because of the
group's strategic interest in non-ferrous metals. The group is among the
industry high-fliers who are shortlisted as potential strategic partners
for Hindustan Copper and Hindustan Zinc, the two large PSUs cleared for
disinvestment.
In the BALCO imbroglio, the Opposition missed
the target by salivating over wild corruption charges levelled by Chhattisgarh
Chief Minister Ajit Jogi. Though Jogi clarified he was echoing the "rumour
mills", he also threatened to cut off water and electricity to the
company, located in his state, if it was sold to Sterlite. In the process,
what has been lost sight of is the fact that even profitable PSUs are
not attracting many top-notch bidders. Why did Alcoa, the lone MNC in
the race, quietly opt out of the BALCO bid? Why was the offer of HINDALCO
so low as to suggest it was in the race for the sake of form? The PSUs
are failing to interest investors because of the Government's insistence
on preserving its veto power. In the future rounds of disinvestments,
therefore, Shourie's main source of worry will be not so much the Opposition
but his own Government, which is still not ready to write off its PSU
ownership.
-with Neeraj
Mishra and Lakshmi Iyer
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