Internal Restructuring with exit for growth : FMCG Sector
Transaction Background : FMCG Sector
A western Maharashtra based 50 years old group operating in the food processing industry and real estate, had 4 group companies with primarily focused on the domestic market with growing focus on export markets. Over a period of time, for various expansion and diversification, the operation of the companies was funded/supported by an individual who acted like a venture capitalist if promoters did not have. The Flagship Company’s (say company 1) main assets were real estate and had created a very good brand name in the food industry also. VC investor perceived substantial appreciation in real estate which was also the view of the promoters-management. Group brand name is being used across all the businesses so the decision was to be taken that Group brand is retained by the group holding company even post hive off. All the shares of company 1 are held by promoters’ family.
In one of another group companies (say company 2), there is an investment by NRI/HNI who failed to give committed investments as per Share Purchase Agreement (SPA) though shares were already allotted. As on date, considering NRI/HNI liabilities to the group, the NRI/HNI is not entitled to any stake in the company. So it was required that the NRI/HNI should not have been allotted any shares in the restructured business. The company had accumulated loss in its book.
Company 3, another group company, was involved in agro-production and agro-processing which had also created a good market for its products. The company had accumulated loss over a period. The company had huge land which was used for agro production and a major chunk of the land was vacant. The market value of the land was so high, that using the land for the purpose of agro-production was not commercially feasible. The company had huge Equity capital base and other securities in the form of Debentures etc. Controlling stake was held by the promoter-management including company 1. A minority were also held by the distributors and C&F agents of company 1 for strategic reasons.
Company 4 was incorporated with the main object of carrying out food business, though no substantial business is carried on.
Founder promoters found difficult in managing two businesses with different risks and returns profiles.
To avoid multiple legal compliances, reduce administrative and marketing cost and have structure for two core businesses
Consolidating the food businesses of the different entities in one Flagship Company
Give stake to another shareholder like VC and distributors
Give an exit to defaulting shareholders (of company 2) without paying significant cash
Expand geographically and product portfolio of food products with inputs from VC and other professional management
Allow to use brand and goodwill of the group without affecting its interest
Restructure the capital structure to support future initiatives
Develop real estate business of flagship company on its own and use surplus generated as promoters contribution into food business and promote new businesses
Critical factors considered for Internal Restructuring
Basic objective of the management
Stages of businesses of the four companies
Capital size of the companies
Accumulated losses of the companies
Size of immovable assets belonging to the companies
Shareholding of the NRI which was to be given exit
Cash outflow and cash sustenance capability of the companies
Brand owned by the companies and so on
All four companies were at the different stages of business and product equity and having altogether different sets of assets
Consolidated food entity would be able to service the capital efficiently
Consider reduction of capital in company 3 &4 .
Consolidate all the food business in one entity and the real estate in another.
As the management had been contemplating to bring IPO for the consolidated food entity (company 4) in near future raising stake would have entailed the promoters-management to bring extra cash to ensure a particular percentage of stakes. However, this was taken care of by allotting shares against share application money to the non-exiting shareholders of company
As the company 3 had only land post restructuring, big capital size was not justified commercially. Therefore, reduction of capital (post-realignment of other securities) was the best fit as this could be implemented through the same scheme to save on time, cost and hassle.
Considering the expected revenue in the near future and asset base of the consolidated food entity (company 4), it was also advisable to do capital reduction in this company also as part of the scheme only to save on cost, time and hassle
