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Will Vidya Chhabria, wife of the
deceased Manu Chhabria, former chairman of the Jumbo group, be able to sell off Shaw
Wallace & Company (SWC)? Recently, the Kolkata High Court ordered a stay on the sale
of SWC shares, the flagship of the $1.5-billion transnational conglomerate Jumbo group
based in Dubai, after three claimants — Vishishth Chai Vyapar, MKJ Enterprises and
MKJ Developers — filed separate petitions for the recovery of their alleged dues of
over Rs 80 crore.
The claimants had supposedly given the money to SWC in 1993-94 as
short-term loans. Though the high court had passed a decree in 1997, asking SWC to return
the money to its creditors, this was never done. Recently, when Chhabria announced her
intention to sell off the 54.5% promoter holding in SWC, the contenders petitioned that
the sale of SWC’s brands, trade marks and assets will make it impossible for them to
realise their debts. They want SWC to pay off its debts before going ahead with the sale.
Liquor baron and chairman of Bangalore-headquartered UB group Vijay
Mallya had evinced interest end December 2004 in acquiring SWC’s liquor business,
Shaw Wallace Distilleries, soon after the SWC management invited bids. Contenders were
Groupe Pernod Ricard, Newbridge Capital-Ramesh Vangal combine and UK-based Whyte &
Mackay. Komal Chhabria Vazir, the second daughter of Manu, is also in the fray to buy out
the SWC’s 100% subsidiary, either in her individual capacity or with the backing of
strategic investors.
Mallya’s spirits business in the UB group, comprising Mc Dowell
& Co, Herbertsons and Triumph Distillers & Vintners, is the world’s
fourth-largest in terms of volumes in 2004 with annual sales of 88 million cases. The
acquisition of Shaw Wallace Distilleries will make Mallya a leading player with almost 60%
of the Indian-made foreign liquor (IMFL) market. He will also earn a second position in
the global listing of liquor companies in terms of volume, overtaking foreign liquor
majors Allied Domecq and Groupe Pernod Ricard.
SWC’s liquor business comprises whisky (65%) and white rum (35%)
with annual sales of nearly 15 million cases. It consists of strong and popular whisky
brands like Royal Challenge, DSP, Antiquity and Haywards Fine Whisky. SWC also owns a 50%
stake in Shaw Wallace Breweries, a 50:50 joint venture formed in 2003 with SAB-Miller to
consolidate its beer business. Besides the core businesses of liquor and beer, SWC also
runs other non-core businesses like gelatines as well as insecticides and fertilisers.
But instead of selecting the bidder for Shaw Wallace Distilleries, the
Chhabria family suddenly invited bids to sell off the promoter holding in SWC. Incensed at
this turn of events, the UB group made public its intention to float an open offer to
acquire a 25% stake in SWC at Rs 250 per share for a total outlay of Rs 300 crore through
group companies McDowell & Co, Phipson Distillery and United Spirits. The valuation of
the entire company at Rs 1200 crore is said to be the highest compared to others in the
race for Shaw Wallace Distilleries.
The open offer comes at a time when SWC has stopped the production of
six of its liquor brands from its portfolio in two states: Malkajgiri Malt Whiskey, Punch
Find and High Command in Andhra Pradesh, Gold Medal Brandy, Black Panther Rum and
King’s Blend Brandy in Kerala. This was primarily due to the increasing cost of raw
materials, particularly molasses.
Financial institutions Unit Trust of India, Life Insurance Corporation
of India and other insurance companies hold a 22% stake in SWC. FIIs own a 7% stake, while
the remaining 16% is with the Indian public.
The SWC management has termed the Mallya bid as a hostile act,
contending that the open offer lacked the consent of UB group promoters and the support of
its management. The SWC management even decided to challenge the offer on the ground that
Mallya had violated their 2004 agreement, to resolve all outstanding disputes between
them, and the UB group had agreed to renounce all claims and withdraw cases against SWC.
SWC has sought legal opinion to check if an existing bidder could make
another hostile bid for assets while the acquisition was still underway. Not only this, it
also tried to woo FIs and banks to acquire their 22% combined holding to prevent Mallya
from acquiring a majority control. After all, SWC knows that with a 16% floating stock,
Mallya’s 25% open offer will succeed only if financial institutions, FIIs and mutual
funds tender their shares.
The other contenders in the race for SWC’s liquor division have
decided not to make any counter-offer. Mallya is adamant that any rival buyer will have to
contend itself with UB group owning a majority control. He also plans to move court if
Chhabria decides to sell the liquor division to another company. This is because the SWC
advisors themselves had confirmed to Mallya that his bid was indeed the highest. Hence,
according to Mallya, the liquor division should be rightfully sold to him.
The Kolkata High Court order does not impact Mallya’s open offer
to the shareholders of SWC, which is scheduled to open on 18 April and close on 7 May.
Meanwhile, the board of Jumbo World Holdings has convened a meeting to finalise the sale
process of SWC.
What is undeniable is that SWC’s financial performance has been
slackening. Revenue has stagnated in the Rs 1000-crore range and profitability has
also slipped. The net profit of Rs 5 crore in FY 2002 dipped to Rs 0.26 crore in FY 2003
and a net loss of Rs 17.91 crore in FY 2005. The net sales slipped from Rs 163.44 crore to
Rs 147.36 crore and Rs 103.89 crore, respectively.
The stock price of SWC, which stood at a low of Rs 136.45 on 14 January
2005, jumped 69.5% to Rs 230.90 on 21 February, the day Mallya announced the open offer.
The stock is now quoting in the region of Rs 225 — a 11% discount on Mallya’s
offer price of Rs 250 per share.
What are the options for the SWC management? As Mallya is primarily
interested in the liquor division, SWC can sell it off at a good valuation to Mallya, and
earn a handsome profit, by obtaining shareholder’s approval. After all, section 23(1)
of Sebi’s Takeover Code allows companies, which are prime takeover targets or where
the open offer is currently on, to sell/transfer/dispose of divisions or assets by
obtaining shareholder approval.
There is yet another option. SWC can invite a white knight to float a counter offer to
secure some of the outstanding shares from the open market to raise promoter holding
beyond 54.5%. But the offer will have to be at a price higher than Mallya’s price of
Rs 250 per share. |
