Crompton-Butterfly Merger Plan: What And Why Of It

Crompton Greaves Ltd.'s management expects its proposed merger with Butterfly Gandhimathi Appliances Ltd. to accelerate the realisation of cost and revenue synergies even as it looks to occupy more kitchen space in Indian households as part of this inorganic expansion.

However, these synergies will not flow to the bottom line immediately, it said.

"One of the biggest opportunities for revenue synergies, which we had also outlined during our acquisition of Butterfly last year, is the expansion of the brand in non-South regions," said Shantanu Khosla, managing director of Crompton, over a conference call with investors on Monday. Currently, the company derives more than 80% of its revenue from the southern regions.

"We will now begin to develop a combined go-to market for the kitchen appliances business of both companies and bring together the scale, which will greatly facilitate the speed of expansion," Khosla said.

The merged company, with a combined distribution network of Crompton and Butterfly, expects to start expanding Butterfly's reach in certain areas in the North and West over the next couple of months on a pilot basis. The consumer electrical firm expects to complete this process in 18 months.

In Mumbai, for instance, Butterfly has about five distributors, while Crompton has four for small appliances. "So, as we combine them, we will have nine distributors to begin with, as opposed to the market leader's network of 12 distributors. This is expected to result in substantial growth."

Crompton currently holds 75% of the stake in Butterfly Gandhimathi. Crompton was already consolidating Butterfly’s financials post-acquisition in 2022. In Q3 FY23, Crompton reported consolidated revenue of Rs 1,516.21 crore, which included Rs 248 crore of revenue from Butterfly products.

"In terms of progress to date on synergies, our focus has been more on cost synergies like combining the sourcing of certain materials like steel, aluminum, etc.," said Khosla, adding that the company has realised about Rs 18-20 crore in synergies. Once the merger is complete, indirect costs like I.T. expenditures, logistics and warehousing will also be rationalised, and Crompton expects the benefits of these synergies to flow in from fiscal 2024 onward.

Khosla, however, cautioned that the synergies would not trickle down to the bottomline immediately. "That's because it will be reinvested in marketing, product innovation, as well as in the broader distribution strategy, etc."

The current manufacturing setup may not be able to meet combined needs, Crompton's managing director said.

"So, we are working on a more integrated way of manufacturing and have also drawn up a five-year plan to expand our capabilities," said Khosla.

Butterfly has underutilised capacity for mixers, and Crompton will start manufacturing mixers in Butterfly's facility.

Crompton is a dominant player in the electrical consumer durable space, with 27% market share in fans, 8% in LED lighting, and 16% in residential pumps, according to the company's presentation. Within the appliances segment, it holds 12% market share in water heaters and 8% in air coolers.

Butterfly, which has a strong foothold in South India with a 11% share in mixer grinders, 8% in gas stoves, and 5% in pressure cookers. "Butterfly will focus only on non-electric and kitchen appliances, where Crompton does not operate. The extent of overlap is only limited to mixers," said Khosla.

The merger is subject to necessary statutory and regulatory approvals and is expected to be completed in 12–14 months.

The management expects the mandatory National Company Law Tribunal approval for the merger by the last quarter of FY24, and the proposed merger to be EPS accretive from the first year of it being effective.

However, getting approval from the majority of the minority shareholders will be a key step to completing the merger. The public shareholders of Butterfly are set to receive 22 equity shares of Crompton for every five equity shares held by them in Butterfly. This values Butterfly Gandhimathi at Rs 2,300 crore, which is lower than the Rs 2,500 crore valuation of February last year, when Crompton acquired a majority stake in it.

Shares of Butterfly Gandhimathi declined 3.69% to Rs 1,227.95 apiece as of 12.22 p.m., compared with 0.66% gains in the benchmark Nifty 50, while shares of Crompton Greaves advanced 0.87% to Rs 295 apiece in trade.