Markets happy with Global merger ratio

NetScribes/Ganesh Ramamoorthy

The announcement of the stock swap ratio of 1:6 for the proposed merger of Global Tele-Systems (GTL) with Global Electronic Commerce Services (GECS) came as a booster for the GTL scrip, which dipped by 7 per cent on September 19 on Bombay.

However, as the speculation about the likely stock swap ratio had already pushed the scrip price up by over 25 per cent in the last three weeks, analysts said that there may not be much appreciation in the scrip, following the announcement. "The scrip may perk up only marginally but will remain firm thereafter at those price levels," says Sagar Tanna, fund manager at Asit C Mehta Brokerage, and added that the counter could see some selling pressure on September 21.

The GTL scrip, which opened from its previous close of Rs 1,416.40 at the Bombay Stock Exchange (BSE), moved up initially to Rs 1,440 in early trades on September 21. But selling pressure pulled the scrip down to a low of Rs 1,345 and close at Rs 1353 on BSE.

Despite the falling price, analysts say that the ratio of one share of GTL for every six shares of GECS for the proposed merger of these two companies is likely to lead to firm trends in GTL.

"The 1:6 ratio is very much in line with our expectations, and as the stock swap will result in a lower expansion of GTL's equity, it will be good for GTL shareholders," Tanna said.

The board of GTL, which met on September 21 and announced the 1:6 ratio. The merger ratio, subject to the approval of shareholders and Bombay High Court, has been arrived on the basis of recommendations made by the independent valuers RSM & Co and Deloitte Haskins and Sells.

Following the merger, which is effective April 2000, GTL will issue 26.42 million new shares by February 2001, to GECS shareholders. By that time, GTL expects to complete all the necessary legal formalities pertaining to the merger.

The merged entity, at GTL's current price, would be valued at over $ 2 billion, making it the largest such merger in the recent past in the Indian telecom and infotech industry.

Post-merger, founders and associates will hold a stake of 34 per cent, domestic banks, financial institutions and mutual funds 13 per cent, international investors, NRIs and OCBs 17 per cent, foreign institutional investors 20 per cent and the public 16 per cent. Prior to the merger, the promoters held 31 per cent of the paid-up capital of GTL and 38.5 per cent of GECS.

"On the face of it, the valuation seems justified as GECS, being an Internet infrastructure provider, will have a lower market valuation as compared to GTL, which is a software services player," Tanna says.

Meanwhile, GTL is exploring business alliances with a company based in the Philippines and another in the US. The company is anticipating that these alliances would lead to equity stake upon completion of due diligence. In another development, RSA Security Inc will provide encryption technology to GTL's payment gateway services, which will enable it to secure all transactions taking place in its payment gateway services.

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