Investors may well recall when Keya Cosmetics Ltd merged with three other firms that were overburdened with debt. The merger pushed Keya Cosmetics to the brink of collapse. The investors who were enthusiastic over contributing to a reliable company eventually ended up making a loss.
A similar scenario is about to be repeated. The shareholders of Bangladesh Steel Re-Rolling Mills Ltd (BSRM Ltd) are about to feel the increased strain of debt because the steel manufacturing giant has decided to merge with its debt-ridden associated firm – BSRM Steel Mills Ltd.
Even though the move was not discussed with investors, they would share the debt worth Tk2,788 crore. BSRM Ltd, which is listed at the stock exchange, has already applied to the High Court for approval of the merger. It is worth noting that BSRM Steel Mills Ltd is not a listed firm.
If the move is approved, BSRM Ltd will get the net assets of BSRM Steel Mills Ltd, which is about 51 percent less than the debt it will also acquire with the merger. However, even the net asset, estimated at Tk1,363 crore in a revaluation by the audit firm Acnabin, has raised questions in the capital market.
According to Professor Abu Ahmed, a stock analyst and former chairman of the Department of Economics at Dhaka University, the investors of BSRM Ltd will have to pay the debt of the directors of BSRM Steel Mills Ltd, which is unacceptable.
Stock analysts believe that the move has been planned chiefly to reduce the burden of debt on the directors of BSRM Steel Mills Ltd by placing it on the investors of BSRM Ltd.
Once the move gets the go-ahead, the debt of the listed-BSRM Ltd will increase by more than 280 percent. Furthermore, as the firms would be merged at a 1:0.5 ratio, BSRM Ltd would have to issue an additional 10.86 crore shares, which would dilute and reduce its income per share.
At present, the income per share of the listed firm is Tk7.88 while that of the non-listed BSRM Steel Mills is Tk2.98.
As per the merger proposal, the net asset value of BSRM Ltd is Tk2,300 crore against its debt worth Tk1,527 crore. Here the debt is 33.61 percent lower than net asset.
But after the merger, the debt would be about 15.11 percent more than the net asset value because BSRM Ltd would be left with Tk3,663 crore net asset against Tk4,315 crore debt. Along with this, the investors would also have to carry the burden of inter-company and third-party debts of the non-listed firm.
BSRM Ltd's officials, however, defended their move by saying that the merge would benefit the firm as a whole.
Shekhar Ranjan Kar, chief financial officer at BSRM Ltd, said that the operating costs of the firm would decline after the merger, while prospects of a profit increase would go up, as both the merging firms are in the same business.
Eventually the general investors would also benefit.
BSRM Steel Mills sells its products to BSRM Ltd, he added.
According to the merger proposal, as of June 30, 2019, the debt-equity-ratio of the BSRM Steel Mills was 61 percent, meaning that it was a high-risk company. On the other hand, the BSRM Ltd, came out as a low-risk company with a debt-equity-ratio of 29 percent.
"Showing increased asset"
Chartered accountants have also questioned the pre-merger revaluation of the BSRM Steel Mills Ltd, which showed that the revaluation reserve increased to Tk822 crore from Tk229 crore since the company was founded three years ago.
The revaluation was calculated on the basis of share exchange ratio disregarding the historical value.
It has been shown that as per the share exchange ratio, the net asset value per share of BSRM Ltd stands at Tk97.86, while that of BSRM Steel Mills stands at Tk34.57.
But according to the historical value the figures are Tk45.99 and Tk13.73 respectively.
The BSRM Steel Mills Ltd has also been presented as a profitable firm in the proposal. Even though financial statements dating back a year reveal that the firm was beset with Tk7 crore losses. In the merger proposal, it was shown to have made Tk147 crore profit in the last fiscal year.
Breach of law
At present, there is no separate regulation in the country regarding backdoor-listing or merging of two firms.
The issue has been vaguely described in the Companies Act, leaving loopholes for sponsors and directors to take advantage of.
According to the FID circular of the Bangladesh Bank, a combination of three approaches – net asset value approach, market value approach and discounted cash flow approach – has to be followed to determine fair value of shares.
The appropriate combination of the three approaches has to be decided on the basis of the nature of a firm's business. But, according to the merger proposal, BSRM Ltd has followed only one approach.
Officials of the Bangladesh Securities and Exchange Commission said, the listed firm has decided to issue shares without any prior notice or application, and this is a violation of section 2A of the Securities and Exchange Ordinance 1969.
Arif Khan, managing director of the IDLC Finance Ltd, said, the approval of the merger depends on the court's decision. Since the merger is between a listed and a non-listed firm, fair valuation is expected here, so that general investors do not have to face losses.
About BSRM Steel Mills Ltd
BSRM Steel Mills Ltd started commercial production on June 16, 2016. It was founded on April 16, 2008 to produce steel billets for BSRM Ltd.