For the two corporations, yes. But not for ITC Classic's investors.

By Hema B Rajashekar with Avijit Ghosal

When `Yogi' Deveshwar, the CEO of the Rs 5,863-crore ITC, had to assign one of his colleagues on the board to manage the crisis at ITC Classic four months ago, he chose the executive director who was once his arch-rival in the race for the corner room, Saurabh Mishra. Poetic, since it was one of the latter's allies, and another of Deveshwar's rivals, ex-executive director Feroze Vevaina, whom he holds responsible for the creation of the mess in the first place. That's Deveshwar for you, forever going for a win-win in every situation.

But is the merger of ITC Classic with the Industrial Credit & Investment Corporation of India (ICICI) really a win-win for everybody? Predictably, Deveshwar, 50, and K.V. Kamath, 47, the CEO of the ICICI, aver that it is so. For the latter, the deal implies future gains with a minimum of risk while the former has unloaded a business inheritance he didn't really want. But that may not be the end of the story. For, it could well be that ITC will prove to be the winner--and the ICICI, the loser--in this mega-deal.

Although Deveshwar, who had opposed the ITC board of directors' decision to bail out the company by injecting Rs 325 crore into it, was always keen on getting rid of ITC Classic, he realised that only one of the country's three mega-financial institutions--the Industrial Development Bank of India (IDBI, 1996-97 income: Rs 6,109.47 crore), the Industrial Finance Corporation of India (IFCI, Rs 2,589.76 crore), or the ICICI (Rs 4,493.53 crore)--were in a position to absorb ITC Classic's losses (of Rs 284.99 crore in 1996-97) and bad loans (no less than 29 per cent of its assets of Rs 1,000 crore).

In fact, while both GE Capital and the Hinduja Group had evinced interest in ITC Classic, they had set pretty stiff terms for a buy-out. So, Deveshwar wooed the three state-owned companies as assiduously as he had during his 11-month-long struggle against the $25.72-billion bat, which had brought him into close contact with both the IDBI's CEO, S.H. Khan, and Kamath. Eventually, he struck a deal with the latter despite his friendship with the former.

Post-merger, the swap ratio of 1 ICICI share for 15 shares of ITC Classic will allow an investor in the latter--if he so desires--to recover Rs 68.90 instead of Rs 330 on a portfolio of 15 shares at the current ICICI scrip price of Rs 68.90 on December 16, 1997. Naturally, ITC Classic's shareholders have seen the price of their investments come down from Rs 22 to Rs 6.15 per share in the last four weeks. Argues the ICICI's Kamath: "The price of the ITC Classic scrip was always an aberration for a loss-making company."

But the dice could roll against the ICICI too. According to Kamath, the only real asset he has acquired is ITC Classic's retail network and its depositor-base of 7 lakh small investors, mostly in the East. However, these very depositors may well opt out of ITC Classic when their fixed deposits fall due for redemption in the next year or two. Especially since the ICICI offers a lower interest rate of 13 per cent as compared to the 16 per cent ITC Classic used to offer.

If these investors do shift to greener pastures, even ITC Classic's retail network may not help the ICICI any although it could be used to strengthen the operations of ICICI Credit (I-Credit), a consumer finance subsidiary that the ICICI floated in April, 1997. Admits Kamath: "The retail network will help us save two to three years." Adds Kalpana Morporia, 48, general manager, ICICI: "ITC Classic's assets may be transferred to I-Credit at a later date."

An additional benefit for the ICICI will accrue in the form of a Rs 110-crore tax-break because of ITC Classic's losses and the provisions for bad loans over the next three financial years. That's something the ICICI sorely needs since its net profits of Rs 572 crore during the first half of this year have shot up by 71.77 per cent over the same period of 1996-97.

Prima facie, the merger is not risky for the ICICI as ITC has agreed to pump in Rs 622 crore to provide for the bad loans and loss-making investments made by ITC Classic. The moot point: will even this sum prove to be enough since the company may have bigger liabilities on its balance-sheet than is evident? Claims Morporia: "Each loan given by the company has been checked during the due diligence process, and we have no doubts about the quality of the performing assets."

One-fourth of ITC Classic's asset base of Rs 1,000 crore accounts for investments in subsidiaries that operate in the stockbroking and mutual funds business. As the ICICI is not interested in them, ITC will provide Rs 272 crore to repay secured creditors, and to make up for the losses due to the decline in the investments made by these subsidiaries. And ITC will also subscribe to the Rs 350 crore of preference shares that the ICICI will issue to provide for ITC Classic's bad loans of Rs 290 crore. Redeemable after 20 years, these shares will offer a dividend of Rs 100 per Rs 1 crore-share. Or 0.001 per cent.

Not only will this inflow of Rs 622 crore provide the ICICI with a cushion against ITC Classic's estimated liabilities of Rs 540 crore, the preference share capital will enhance its net worth, giving it a leveraging potential of 10 times the amount. But much depends on whether the ICICI will be able to recover ITC Classic's remaining loans of Rs 460 crore. Since 70 per cent of ITC Classic's clients also deal with the ICICI, the latter must be counting on doing so.

But then, the ICICI's gain must be ITC's loss. Sure, but the biggest-ever payout in corporate history in this country was inevitable given the mess ITC Classic was in. While ITC must fork out Rs 622 crore--which may not be difficult as the tobacco giant has recorded net profits of Rs 301.73 crore in the first half of 1997-98--it is, after all, getting rid of the company. Claims a senior ITC manager: "We have taken adequate care to ensure that the outflow does not hurt ITC's growth plans in any way."

Then, Deveshwar has only to reckon with ITC Classic's subsidiaries, and their investments in ITC Agrotech Finance, Russell Investment, and VST Investments. Explains Saurabh Mishra, 50, executive director, ITC: "Of the three arms (of ITC Classic), Classic Credit, an investment company, will cease to exist, and its investments in the group companies will be retained. We are looking for potential buyers, or partners, for the other two, Classic Stockbroking and Classic Home Finance." And BT learns that a deal with another government-owned institution could be in the offing.

As for ITC Classic's shareholders, according to whizkid Mukesh Palta, 45, the managing director of ITC Classic, they "will become the owners of a stronger company which has the potential to grow." And ICICI's Morporia suggests that they will gain from an appreciation in the ICICI scrip instead of being stuck with the shares of a loss-making company. But, given the swap ratio, the ICICI scrip must appreciate by nearly 400 per cent for the shareholder to realise the pre-merger price. Only then can this be said to be a win-win deal for ITC, the ICICI--and the small investor.