The merger of the companies was decided upon keeping in mind the profitability, intrinsic worth and asset value of both companies while maximising shareholder returns, according Ashwin Muthiah, deputy chairman of the MA Chidambaram group.

MAC Agro was finding it difficult to sustain itself in its current business lines. It had suffered huge losses in its aqua and marine export business.

The more potential divisions like sugar and distilleries lacked funds to grow.

"It would be impossible to fulfill shareholders' expectations in continuing to give dividends under the current scenario," Muthiah said at a media briefing. For the first quarter of the current year the company made a marginal profit of Rs 2.5 lakh on a turnover of Rs 79crore. The assets of the company stand at Rs 125 crore and liabilities Rs 75 crore.

The merger would have the effect of beefing up SICAL's asset base. Being a service oriented business now, SICAL lacks the protection of tax shields and manufacturing assets. With the merger, with depreciation facilities on account of assets, the difference between the profit before tax and after tax would lessen, he said.

The merged entity SICAL could work for a better rating which would help it leverage funds better. It could borrow more and retire high cost debts. It could also borrow more for consolidating operations, and make every division a profit oriented centre by itself. A diversified entity such as SICAL was also expected to withstand recession better, with better hedging facilities.

In the future, if it was required that spinoffs through joint ventures for better growth were needed, that would be done, Muthiah said. But for now consolidation was the buzzword.

The merger would be effective from April 1, 1998once court formalities were completed. Post merger SICAL turnover for the current year was expected to be Rs 2000 crore (Rs 400 crore from MAC Agro). The net worth would be Rs 1200 crore and capital base Rs 27.5 crore. A reduction in promoter's control was inevitable, "but such sacrifices had to be made", said Muthiah.

After the merger, the company would be investing Rs 100 crore for a new sugar mill cum cogeneration plant (25 mw) in South Arcot district for which it already has a licence. More brands and a greater market for Shaw Wallace liquor for which it is a franchisee would be developed.

Work on the Tuticorin Port Trust for which an agreement was signed recently which would be implemented next year would be facilitated, as also work on the Jawahar docks here, said Muthiah.