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Crompton Greaves Consumer (Crompton) announced, over the weekend, the proposed scheme of amalgamation (merger) of its subsidiary Butterfly Gandhimati (Butterfly) with itself through share swap (22 shares of Crompton for every five shares in Butterfly; c.3% dilution to the current share count), subject to various regulatory and shareholders approvals. While it refrained from quantifying the merger benefits, it stressed upon various synergies on revenue (distribution/brand/GTM marketing), direct cost (warehousing/logistics) as well as indirect cost fronts. We believe this is a step in the right direction though it happened earlier than we expected, as Crompton had just offloaded 6% stake in Butterfly in Sep’22 at c.INR 1,510/share and the stock had corrected c.15% to INR 1,275 (closing price on 24th March). The merger is positive for Crompton shareholders as a) it can best realise the synergy benefits (our current estimates do not reflect these fully), and b) offers a better valuation multiple for Butterfly profits (we value Crompton at 35x vs 32x for Butterfly). As the merger is subject to approvals (expected to be completed by end-FY24), we do not change our estimates at present. We maintain our Mar’24TP of INR 435, basis SoTP valuation.

* Merger announcement and rationale:

Crompton Greaves Consumer (Crompton) announced, over the weekend, the proposed scheme of amalgamation of its subsidiary Butterfly Gandhimati (Butterfly) with itself through share swap (22 shares of Crompton for every five shares in Butterfly; c.3% dilution), subject to various regulatory and shareholder approvals (requires a majority of the minority shareholders in Butterfly to approve this scheme). Crompton highlighted that the merger a) will accelerate and smoothen the realisation of synergies of the combined business (manufacturing, branding, sourcing, distribution, common overheads, etc), b) Simplify corporate and governance structure and result in convergence of public shareholders and Butterfly shareholders at the parent level, and c) Align the interests of shareholders of both companies, and benefit all stakeholders.

* Swap ratio and timelines: Upon merger, the public shareholders of BGAL as on the record date will receive 22 equity shares of Crompton for every five equity shares held by them in BGAL, as a consideration for the merger. Post-merger, the public shareholders of Butterfly will hold ~3.0% stake in the combined entity. Ernst & Young Merchant Banking Services LLP and PwC Business Consulting Services LLP, the independent valuers appointed by Crompton and Butterfly respectively, have recommended a share exchange ratio for the merger. The company expects the entire process to take 12-14 months and hopes to complete it by end-FY24.

* Background: In Mar’22 (link to our note on acquisition), Crompton acquired 55% stake in Butterfly Gandhimathi Appliances Limited for a total consideration of INR 13.8bn (9.8mn shares at INR 1,403/share) and acquired another 26% through the open offer route (4.6mn shares at INR 1,434/share), thus taking its holding to 81%. In Sep’22, it offloaded 6% stake at c.INR 1,510/share to institutional shareholders to meet the regulatory requirement of minimum public float of 25%. Butterfly is amongst the top three kitchen and small domestic appliances players in India. Its product portfolio includes a complete suite of kitchen appliances including mixer grinders, wet grinders, pressure cookers, stainless steel vacuum flasks, LPG stoves, and non-stick cookware. In South India, Butterfly leads the market in wet grinders and LPG stoves and also is among top 3 players in mixers, cookers and stoves in south India.

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