Prabhat sale may bring little cream, investors dump stock

Mumbai: The sale of Prabhat Dairy’s fresh milk business to French firm Lactalis has not gone down well with investors with the stock dropping 14.3 per cent to close at Rs 79.75 on Tuesday. The business, which was sold for Rs 1,700 crore, contributed almost 98 per cent to the company’s revenues.

The deal is happening at an 80 per cent premium to the company’s market capitalisation of Rs 909 crore on Monday, but that did not enthuse investors. Analysts said the structure of the deal and lack of clarity on how the company will use the deal proceeds have not gone down well with investors.

“Though the deal value is at significant premium to current enterprise value of the company, there is lesser clarity on the company’s intent to sell its core business and invest in the existing cattle feed business,” said Kaustubh Pawaskar, research analyst, Sharekhan. “If management shares a substantial portion of the sale proceeds with the shareholders, then it would be a positive, otherwise the deal would not be fruitful for existing shareholders.”


The business was sold for 1.1 times company’s FY18 sales of Rs 1,554 crore. Prabhat shares soared 20 per cent in early trade on Tuesday in response to the deal announcement but the optimism fizzled out with the stock falling 30 per cent from the day’s high. The stock has fallen 58 per cent in the last one year. Some analysts said the deal has not been structured well to benefit existing minority shareholders.

“We are negative on the deal as the promoters are selling 98 per cent of total company revenue, but Prabhat Dairy shareholders will only benefit to the extent of 29 per cent of the sale value as Prabhat Dairy owns 29 per cent of the company being sold directly, with the rest held through another company’s subsidiary firm Cheese Land Agro,” said Sameer Kalra, founder, Target Investing. “Prabhat Diary could have merged Cheese Land Agro with itself and then should have sold the business for a clean deal.”

Prabhat will now focus on its cattle field and animal genetics business with the sale of its dairy business.

Market participants allege that companies are selling their core divisions, which contribute a substantial part of their revenues, without any benefits accruing to minority shareholders, who are in no position to block the sale.

“Investors have lost confidence in these kinds of deals as there are examples where shareholders were not rewarded with the sale proceedings,” said Ashutosh Mishra, head of research, Ashika Stock Broking.

Analysts said in instances where core businesses are sold — known as 'slump sale’ — minority shareholders end up at the receiving end.

Recently, Porinju Veliyath, managing director, Equity Intelligence India said in a letter to his investors that LEEL Electricals had received Rs 1,550 crore cash from sale of the consumer durables division to Havells but the company diverted nearly Rs 340 crore to promoter entities including the listed debt-laden Fedders Electric as capital expenditure and loans for buying land and factories of their own plants. Equity Intelligence held nearly 8 per cent in LEEL.