ITC Hotels demerger is a good deal for investors

livemint.com:

ITC Ltd was looking to spin-off its hospitality division had been floating around for a while, and on Monday the conglomerate announced the development. The hotels division of the diversified conglomerate will be demerged under a scheme of arrangement with stakes in the new company allotted proportionately. That is, ITC as the flagship company will hold around 40% in the new entity, and the remaining 60% will be allotted to shareholders in proportion to their current shareholdings in ITC.

Following news of the proposed demerger, the ITC stock promptly fell by over 4% even as the market has welcomed the news.  Let’s unpack this apparent paradox.  The hotels and hospitality business was an integral part of ITC which will now own only 40% directly. So revenues and profits from that segment cease to be reflected directly in ITC’s accounts. But ITC will retain management control as the single largest shareholder with 40%.

The single-largest shareholder in ITC itself is the giant multinational, BAT, which owns about 29% of ITC. BAT should, therefore, own another 29% of the new entity. So operational control remains with the ITC group and ITC would receive dividends from the new entity, if any, and report its share of profits from the new business in its P&L account.

Making several assumptions, this implies investors get a good deal. A scheme of arrangement has to be approved by shareholders and by the court – let’s assume that happens and then the new company is to be listed separately. This means somebody with a stake in the new listing, whenever it happens, will see the value of the hotels business reflected directly in the price of their shares.