Stock Demerger – Challenges for Shareholders

On 30th August’22, Piramal Enterprises started trading as the demerged entity retaining the Financial Services business and a new Entity “Piramal Pharma” which will house the Pharma business of the combined entity will get listed later in the 3rd qtr of the current financial year.

However the biggest drawback of such demerger and delay in relisting of the new entities for the existing shareholders are:-
1) The Investor is in complete dark about their investment value till the new demerged entities stock get listed at a price whose combined value should be at least equal if not greater then the day the trading of the combined entity got stopped.
2) Stocks are considered to be one of the most liquid investments as they can be sold anytime to convert into cash in max 2-3 days but in this scenario, Share holders are stuck with their investment. As of now only Piramal Enterprises with only Financial Service sector portfolio of the erstwhile entity is trading at almost 55% of the combined value and the rest is stuck till Piramal Pharma gets listed.

The ideal option in such scenario should be:-
The existing shareholders should be well informed at least a week or 10 days before the changes in trading plans and post demerger listing plans so that they can take a decision to exit if they so desires till clarity emerges on the valuation of the two separate entities.

Or

Both the entity should get listed immediately post demerger so that the correct value of the demerged entities vis-a-vis the combined entity can be ascertained based on the traded share price and enable the shareholders to take their decision accordingly.

Let’s calculate the new demerged entity Piramal Pharma price based on the decision that for every one share of Piramal Enterprises, the existing shareholders will get 4 shares of the new entity of Piramal Pharma.

a) The closing price of Piramal Enterprises on 29Aug’22 when it last traded as combined entity was 1,926.
b) The new listing price of Piramal Enterprises which is left with just the Financial Services business was 1,055.
c) So if we just take the difference of 1,926 and 1,055, the Pharma entity value is 871.
d) Since it will be divided into 4 shares, Piramal Pharma share should list at minimum 218 to maintain the parity between the last closing price of the previous entity and the total value of the two new demerged entity.

So let’s wait for the listing of Piramal Pharma share (as per management it should happen in 3rd qtr) to conclude if the shareholders have lost or gained after the demerger.

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