BASF Ciba Merger - Good for shareholders?

BASF, the parent company of BASF India, announced on 15 September 2008 its intention to acquire Ciba Holdings AG, the parent company of Ciba India. Ciba India, informed about the public tender offer of BASF for shares of Ciba Holdings AG on 31 March 2009. BASF completed its acquisition of Ciba Holdings AG on 9 April 2009. On 11 April, BASF announced an open offer to acquire 20% shares of Ciba India at INR 237.13. The offer started on June 4, 2009 and ended on June 23, 2009. BASF was able to gather only 2.12% (281,584) more shares instead of 20% (2,656,164) that it offered to acquire. On September 7, 2009, both the companies, BASF India and Ciba India, announced to meet on September 12, 2009 for amalgamation. The share swap ratio was announced on September 14, 2009 where shareholders of Ciba India will get 90 shares of BASF India for every 100 shares held and shareholders of Ciba Research India will get 18 shares of BASF India for every 100 shares held.


If we look at the fundamentals of both the companies, the average consolidated sales of BASF India between 2007-2009 was around INR 1100 Crore with a consolidated average net profit of around INR 55 Crore. On an equity base of INR 28.19 Crore, the EPS turns out to be around INR 19.5. For Ciba India, the average consolidated sales between 2007-2009 was around INR 615 Crore with a consolidated average net profit of around INR 28 Crore. On an equity base of INR 13.28, the EPS turns out to be around INR 21.1. Even book value of Ciba India was INR 235 compared to INR 137 for BASF India. On all these parameters, it looks like Ciba should have been valued more than that of BASF, but the actual case is completely reverse. The results of the last four quarters might have impacted the valuers since Ciba is making losses since March 2009 (mostly due to extraordinary expenses).

If we look at the combined entity, the company will do around INR 2100 in consolidated sales and INR 80 Crore in consolidated net profit. Since the equity base would go up from INR 28.19 Crore to INR 40.142 Crore (approx), the EPS would be around INR 20. At INR 360, the BASF share price is trading at around 18 times FY10 earnings, neither very cheap nor expensive. The book value of the company would also come to around INR 180 per share, making Price/book of 2, not very cheap nor expensive.

Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience. And selling short a too popular and therefore overvalued issue is apt to be a test not only of one’s courage and stamina but also of the depth of one’s pocketbook. - Benjamin Graham