Concerns crop up in Global merger

NetScribes/Ganesh Ramamoorthy

The shares of Global Tele-Systems (GTL) came under severe selling pressure at the bourses on September 22. The reason was concerns over equity dilution to the tune of more than 65 per cent following the merger of the company with Global Electronic Commerce Services (GECS).

Though the announcement came on Wednesday, there wasn't a major impact on the stock price on Thursday. But Friday's overall crash and concerns about the merger resulted in the stock closing at the lower circuit filter of 16 per cent.

The GTL scrip dropped16 per cent in afternoon trades on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The scrip crashed by Rs 216.35 to close at Rs 1,136.15 with huge volumes of 5.8 million shares. At the NSE, the scrip declined by Rs 217.65 to close at Rs 1,142.85 with a total volume of 6.1 million shares.

"The fall in the scrip price reflects the market's concern over such a huge dilution in the equity capital, though the decline was triggered mainly by the across-the-board selling in software scrips," said an analyst with a Bombay-based securities firm who doesn't wish to be quoted.

Post-merger, GTL's equity capital will jump by 65.5 per cent to Rs 718.3 million from the existing Rs 434.1 million. The public holding will be about 16 per cent, he added. With more than 80 per cent of the new shares expected to be with long-term investors, the total float in the market will only be about 7-8 million.

Besides equity dilution, the market is also concerned about the contribution of GECS to the bottomline of the merged entity. GECS posted a loss of Rs 49.1 million during fiscal 2000 and hence marketmen do not see much addition happening to the bottomline of the merged entity.

However, the analyst said since GECS owns substantial amount of network assets which are used by corporates and customers. The revenues would grow by more than 100 per cent to about Rs 1.3 billion this year from Rs 400 million last year.

In terms of revenue and bottomline growth, analysts expect the company to maintain its traditional 21 per cent growth in revenues, and the bottomline to improve by about 30-35 per cent. "With about 65 per cent dilution in capital, GTL will, at best be able to maintain its present growth rate on the merged entity," the analyst said.

However, the actual benefits for the merged entity would come in the form of software licensing, reach to global markets and increased valuation for GTL. "This will account for about Rs 6.9-9.2 billion over five years," the analyst said. But he still felt that the merger was expensive, as there were operating savings of only Rs 138 million on a capital dilution of about 65 per cent.

Global Tele provides software services, engineering services and e-commerce applications. GECS is engaged in providing corporate Internet infrastructure and access, data centres and international gateways in the B2B space. According to the company, the merger will form a formidable combination of e-commerce, networking services and software services.

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