Suryakant Chemicals, at 25x earnings, buys Nilanjana Specialty at 30x with 60% stock and 40% debt. Compute the EPS impact and the pre-tax synergies needed to break even, and explain why the deal dilutes.

Pro forma EPS is about Rs 8.91 against Rs 10.00, 10.9% dilutive, and it takes about Rs 70 crore of pre-tax synergies to break even. Net income is 400 plus 120 less Rs 86.4 crore of after-tax interest on Rs 1,440 crore of debt, Rs 433.6 crore. Shares are 40 plus 8.64 crore issued at Rs 250, 48.64 crore. The one line: Suryakant is buying earnings that yield 3.33% with stock that costs 4.0% and debt that costs 6.0% after tax; both are dearer than what they buy.

Think of borrowing at 6% to put money in a deposit paying 3.3%; you lose the difference every year. A deal is accretiveIncreases earnings per share for the buyer; dilutive is the opposite. A test of the arithmetic of the deal, not of whether it creates value. only if the earnings yield on the price paid exceeds the cost of the money used to pay it. Nilanjana's earnings on Rs 3,600 crore yield 1 over 30, 3.33%. Suryakant's stock costs its own earnings yield, 1 over 25, 4.0%. The debt costs 8% less the tax shield, 6.0%. Blended 60/40, the funding costs 4.8% against 3.33% earned, so the answer is dilutive before a single number is added up.

Income first, then shares. Pro forma net income is 400 plus 120 less the after-tax interest on the new debt: Rs 1,440 crore at 8% is Rs 115.2 crore, Rs 86.4 crore after the 25% tax shield, leaving Rs 433.6 crore. New shares are the stock portion, Rs 2,160 crore, divided by Rs 250: 8.64 crore, taking the count to 48.64 crore. EPS is 433.6 over 48.64, Rs 8.91, 10.9% below Rs 10.00.

The waterfall shows the shares do most of the damage: the new stock costs Rs 1.93 of EPS against Rs 2.16 for the debt, because issuing at 25x to buy at 30x hands 18% of the company to Nilanjana's owners for 28% of the combined earnings. To break even, net income must reach Rs 486.4 crore, Rs 52.8 crore more, which is Rs 70 crore of pre-tax synergies, about 44% of Nilanjana's pre-tax profit. That is a large ask for a chemicals bolt-on; the director's line is that the deal needs Rs 70 crore of cost-outs before it stops costing shareholders anything.

Then the caveat every banker gives: dilution is not the same as value destruction. If Nilanjana grows faster than Suryakant, year-two EPS may look different, and a 30x multiple might be right for a business with better returns. But an EPS test is what the market will run on announcement day, and a board that cannot show Rs 70 crore of credible synergies should expect the stock to say so. More debt and less stock would narrow the gap, since 6% is cheaper than 4% is dear; it would also add leverage the board has not yet discussed.